<PAGE>
FILED PURSUANT TO RULE 424(B)(1)
REGISTRATION NO. 333-34067
7,500,000 SHARES
LOGO
[Logo of Group Maintenance America appears here]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
----------------
All of the 7,500,000 shares of Common Stock, par value $0.001 per share
("Common Stock"), offered hereby (the "Offering") are being sold by Group
Maintenance America Corp. ("GroupMAC" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price of the Common Stock. The Common Stock has
been approved for listing on the New York Stock Exchange ("NYSE") under the
symbol "MAK."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $14.00 $0.98 $13.02
- --------------------------------------------------------------------------------
Total(3).................................. $105,000,000 $7,350,000 $97,650,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $4,500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 1,125,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$120,750,000, $8,452,500 and $112,297,500, respectively. See
"Underwriting."
----------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to prior sale when, as and if received and accepted by the
Underwriters, subject to their right to reject orders, in whole or in part,
and to certain other conditions. It is expected that delivery of the
certificates will be made against payment therefor at the office of The
Robinson-Humphrey Company, LLC, Atlanta, Georgia, on or about November 13,
1997.
THE ROBINSON-HUMPHREY COMPANY
WILLIAM BLAIR & COMPANY
ABN AMRO CHICAGO CORPORATION
November 6, 1997
<PAGE>
[The inside front cover of the Prospectus is a gatefold containing a map of
the lower 48 United States with state boundaries depicted. The map is
captioned "Locations of GroupMAC Companies at closing" (with color dots
indicating locations). Opening the gatefold reveals a collage of 15
photographs and two maps of the lower 48 United States with state boundaries
depicted. The photographs are in color and depict the following: a worker
working on the electric component of a water heater, a worker preparing metal
for installation, a worker working at and inspecting a circuit breaker, an
employee working at a circuit board and utilizing a color monitor, an Airtron
six-wheel service truck, a worker installing ductwork, a worker being admitted
to a residence, a worker standing next to the open driver's door of a Hallmark
panel truck, an employee and a homeowner at the front door of the residence
looking at a hand-held computer, MacDonald-Miller workers working on an air
conditioning unit on a roof top, a worker on a step ladder installing ceiling
air conditioning duct work at a commercial site, an employee outside an A-ABC
service truck in the process of making a house call, a worker checking the
level of coolant in a residential air conditioner compressor, employees in a
dispatching room with job ticket postings on the wall, offices employees
working at work stations. Beneath the collage of photographs are the two maps.
The two maps carry the following captions and depict from left to right (i)
Clients of Callahan Roach, primarily involved in residential HVAC (with color
dots indicating locations), and (ii) Commercial HVAC affiliates of United
States Alliance (with color dots indicating locations).]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRE-OFFERING COMPANIES YEAR FOUNDED HEADQUARTERS LOCATION
<S> <C> <C>
Airtron, Inc. 1970 Dayton, OH
K&N Plumbing, Heating, and Air Condition-
ing, Inc. 1978 Arlington, TX
A-ABC Appliance, Inc./A-1 Appliance & Air
Conditioning, Inc. 1976 Dallas, TX
Sibley Services, Incorporated 1974 Memphis, TN
Hallmark Air Conditioning, Inc. 1951 Houston, TX
Charlie Crawford, Inc. (dba "Charlie's
Plumbing") 1979 Houston, TX
Costner Brothers, Inc. 1985 Rock Hill, SC
AA JARL, Inc. (dba "Jarrell Plumbing") 1957 Houston, TX
Way Residential 1977 Houston, TX
Callahan Roach 1989 Colorado Springs, CO
United Service Alliance, L.C. 1988 Lakewood, CO
<CAPTION>
OFFERING ACQUISITION COMPANIES
<S> <C> <C>
MacDonald-Miller Industries, Inc. 1965 Seattle, WA
Masters, Inc. 1986 Gaithersburg, MD
Linford Service Company 1960 Oakland, CA
Yale Incorporated 1939 Minneapolis, MN
Central Carolina Air Conditioning Company 1967 Greensboro, NC
Willis Refrigeration, Air Conditioning &
Heating, Inc. 1954 Cincinnati, OH
Paul E. Smith Co., Inc. 1967 Indianapolis, IN
Southeast Mechanical Service, Inc. 1979 Hollywood, FL
Van's Comfortemp Air Conditioning, Inc. 1965 Delray Beach, FL
Arkansas Mechanical Services, Inc. 1988 Little Rock, AR
Mechanical Services, Inc. 1993 Little Rock, AR
All Service Electric, Inc. 1990 Jacksonville, FL
Evans Services, Inc. 1901 Birmingham, AL
</TABLE>
- -------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
MAINTAINED BY THE UNDERWRITERS IN THE COMMON STOCK, AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The Company has acquired 11 companies (the "Pre-Offering Companies") and has
entered into definitive agreements to acquire an additional 13 companies (the
"Offering Acquisition Companies" and together with the Pre-Offering Companies,
the "GroupMAC Companies") upon the closing of the Offering. The following
summary is qualified in its entirety by reference to, and should be read in
conjunction with, the more detailed information and the financial statements,
including the related notes thereto, appearing elsewhere in this Prospectus.
Unless the context otherwise requires, (i) the "Company" or "GroupMAC" refers
to Group Maintenance America Corp. and the GroupMAC Companies, as well as to
the business and operations of their predecessors, (ii) the information in this
Prospectus assumes that the Underwriters' over-allotment option has not been
exercised and (iii) all information in this Prospectus relating to the number
of shares of Common Stock and per share amounts reflects the 1-for-2.5 reverse
stock split effected prior to the date of this Prospectus. References to fiscal
year financial information of the Company refer to the fiscal year ended
February 28 or 29 of the relevant year or the respective fiscal year ends of
the individual GroupMAC Companies, and references to pro forma financial
information of the Company or combined financial information of any group of
the GroupMAC Companies refer to a year ending December 31 of the relevant year.
After completion of the Offering, the Company's fiscal year will be the
calendar year.
THE COMPANY
The Company was founded in 1996 to create the leading nationwide provider of
heating, ventilation and air conditioning ("HVAC"), plumbing and electrical
services to residential and commercial customers. Since inception, the Company
has acquired 11 companies (the "Pre-Offering Companies") totaling $138.8
million in combined 1996 revenues and has definitive agreements to acquire an
additional 13 companies (the "Offering Acquisition Companies") upon the closing
of the Offering. After the Offering, the Company believes it will be one of the
largest diversified providers of HVAC, plumbing and electrical services in the
United States with operations in 37 cities in 21 states. The market for these
diversified services is approximately $100 billion. The Company's pro forma
1996 revenues and income from operations were $307.5 million and $20.8 million,
respectively, and combined historical revenues of the GroupMAC Companies grew
at an annual rate of 14.3% from 1994 through 1996.
The Company offers a comprehensive range of services to residential and
commercial customers in both the new installation and the maintenance, repair
and replacement segments of the HVAC, plumbing and electrical service
industries. The Company's services include installing and maintaining,
repairing and replacing central air conditioning systems, furnaces, heat pumps
and plumbing and electrical systems. Approximately 74%, 23% and 3% of the
Company's pro forma 1996 revenues were derived from HVAC, plumbing and
electrical and other services, respectively. Approximately 59% of pro forma
1996 revenues were derived from residential services and 41% from commercial
services, while 54% of pro forma 1996 revenues were from the new installation
segment and 46% were from maintenance, repair and replacement services. Through
Callahan Roach and United Service Alliance, L.C. ("USA"), the Company also
provides consulting services and sells products to over 1,300 independent HVAC
and plumbing service companies. The Company believes that its broad service
offerings and geographic diversity provide several advantages, including the
ability to offer its customers a single source for a range of services, to
consolidate purchasing power with vendors, to capture business from customers
that operate on a regional and national basis, to mitigate the effects of
seasonality and to balance local or regional economic cycles.
The Company believes that it can maximize its long-term growth and
profitability by participating in both the new installation and the
maintenance, repair and replacement segments of the HVAC, plumbing and
electrical service industries. The new installation business is generally
characterized by higher volume sales to homebuilders, commercial developers and
other large customers. The maintenance, repair and replacement business
generally
3
<PAGE>
produces higher margins from services provided to a broader customer base. The
Company intends to focus on growing its maintenance, repair and replacement
business, to capitalize on the higher margins and the more predictable nature
of revenues associated with this segment and to target a revenue mix of
approximately 60% maintenance, repair and replacement and 40% new installation
over time. The Company derives considerable profits and strategic value from
its new installation business, as this segment generates a database of
potential customers for maintenance, repair and replacement services. The
higher volumes associated with consolidating a number of new installation firms
provide purchasing economies of scale that increase the competitiveness of both
the new installation and the maintenance, repair and replacement segments.
The Company believes that growth through acquisition is important and that
profits can be maximized through the efficient integration of acquired
companies. In order to provide the Company with integration, internal training
and management development capabilities, the Company acquired two leading
national HVAC consulting organizations, Callahan Roach and USA, in July 1997.
Callahan Roach serves HVAC and plumbing service companies across the United
States in such areas as advertising, marketing, business valuation, pricing
strategies, management information systems, acquisition planning and
integration and general consulting. Callahan Roach maintains relationships with
over 1,200 HVAC and plumbing service companies, principally in the residential
market. The Company estimates that aggregate revenues for these Callahan Roach
customers are in excess of $2 billion annually. USA provides training and other
products and services to 105 independent commercial HVAC service companies
across the United States. The Company estimates that aggregate revenues for
these USA customers are in excess of $1 billion annually. Of the 24 GroupMAC
Companies, 12 were clients of Callahan Roach and/or USA prior to their
acquisition. The Company intends to utilize these complementary customer bases
to advance its national marketing strategies and believes that these companies
will be a source of future acquisition prospects.
Available industry data indicate that the Company's markets are large and
fragmented. The HVAC service market is estimated to be approximately $65
billion in annual revenue, with over 40,000 service providers. Approximately
$26 billion of the total is represented by the residential market, with the
commercial market representing the balance. The plumbing service market is
estimated to be $19 billion and the electrical service market is estimated to
be $16 billion. The plumbing and electrical service markets each have over
30,000 participants. The vast majority of participants in the HVAC, plumbing
and electrical service industries are small, owner-operated businesses with
limited financial resources and limited access to capital for expansion. The
Company believes there is a significant opportunity for a well-capitalized,
nationwide provider of these services to consolidate a large number of
independent companies.
The Company is implementing operating and acquisition strategies to maintain
and expand its position as a leading national provider of comprehensive HVAC,
plumbing and electrical services to the residential and commercial markets.
Key elements of the Company's operating strategy are to:
. achieve operating efficiencies through volume purchasing, the
implementation of "best practices" and the development of strong
internal training capabilities;
. operate on a decentralized basis to allow entrepreneurial management to
continue to capitalize on local market knowledge and existing customer
relationships;
. attract, develop and retain high quality technicians to assure superior
customer service; and
. establish national market coverage to provide full service to regional
and national accounts.
Key elements of the Company's acquisition strategy are to:
. acquire companies across multiple market segments to provide a balanced
mix of revenues and foster internal growth through cross-selling of
services;
4
<PAGE>
. expand geographically by acquiring core businesses in new markets and
"tucking in" smaller companies;
. utilize Common Stock to retain and provide incentives to the management
and employees of acquired companies; and
. leverage its industry reputation and relationships to make future
acquisitions.
The Company is a Texas corporation with its principal executive offices
located at 8 Greenway Plaza, Suite 1500, Houston, Texas 77046, and its
telephone number is (713) 860-0100.
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered.................................. 7,500,000 Shares
Common Stock to be Outstanding after the Offering (1). 19,962,527 Shares
Use of Proceeds....................................... To redeem or repay
outstanding warrants,
preferred stock and
indebtedness used to
acquire the Pre-Offering
Companies, to fund the
cash portion of the
consideration for the
Offering Acquisition
Companies, to repay
indebtedness of the
Offering Acquisition
Companies and for other
general corporate
purposes including
working capital and
future acquisitions. See
"Use of Proceeds."
NYSE Symbol........................................... MAK
</TABLE>
- --------
(1) Includes 2,976,130 shares to be issued in connection with the acquisition
of the Offering Acquisition Companies and Callahan Roach concurrently with
the Offering and as acquisition consideration adjustments, but excludes
609,461 shares of Common Stock issuable upon exercise of outstanding stock
options and warrants issued in connection with certain acquisitions,
378,800 shares of Common Stock issuable upon exercise of outstanding stock
options held by employees and a former executive officer of the Company and
1,899,581 shares available for issuance under options to be granted upon
consummation of the Offering. See "Management--Option Grants" and "--Stock
Awards Plan."
RECENT DEVELOPMENTS
The historical condensed results of operations for the seven months ended
September 30, 1997 reflect the acquisitions of the Pre-Offering Companies from
the respective dates of acquisition as discussed elsewhere in this Prospectus.
The unaudited historical information includes all adjustments management deems
necessary to fairly present the results of operations in accordance with
generally accepted accounting principles. The condensed pro forma financial
data for the nine months ended September 30, 1996 and 1997 reflect the
acquisitions of the Pre-Offering Companies and Offering Acquisition Companies
as if they had occurred at January 1, 1996. The condensed pro forma financial
data have been prepared on the same basis outlined in the Unaudited Pro Forma
Combined Financial Statements and the notes thereto included elsewhere herein.
The data presented below should be read in conjunction with the Summary
Historical and Pro Forma Financial Information, Selected Historical and Pro
Forma Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Financial Statements and the related
notes thereto and the Unaudited Pro Forma Combined Financial Statements and the
notes thereto included elsewhere herein.
5
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA AS
SEVEN MONTHS ADJUSTED NINE
ENDED SEPTEMBER MONTHS ENDED
30,(1) SEPTEMBER 30,(3)
--------------- -----------------
1996 1997(2) 1996 1997
------- ------- -------- --------
(UNAUDITED--IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................... $48,826 $70,468 $232,695 $244,321
Gross Profit................................ 13,434 19,491 53,059 57,281
Selling, General and Administrative
Expenses(4)................................ 10,003 12,153 36,934 38,782
Compensation Expense from Reverse
Acquisition(5)............................. -- 6,978 -- --
Corporate Overhead(6)....................... -- 2,486 -- 2,836
Goodwill Amortization(7).................... -- 204 1,419 1,419
------- ------- -------- --------
Income (Loss) from Operations............... 3,431 (2,330) 14,706 14,244
Other Income (Expense), Net(8).............. 40 (868) 376 902
------- ------- -------- --------
Income (Loss) Before Income Tax Provision... 3,471 (3,198) 15,082 15,146
Income Tax Provision(9)..................... 1,396 1,602 6,594 6,627
------- ------- -------- --------
Net Income (Loss)........................... $ 2,075 $(4,800) $ 8,488 $ 8,519
======= ======= ======== ========
Net Income Per Share........................ $ .42 $ .42
======== ========
Weighted Average Shares Outstanding(10)..... 20,163 20,163
======== ========
</TABLE>
- --------
(1) Concurrent with the Offering, the Company intends to change its fiscal year
end from February 28 to December 31.
(2) The Company's acquisitions of the Pre-Offering Companies and Group
Maintenance America Corp. have been accounted for as purchases and,
accordingly, the operations of these acquired businesses are included in
the financial data from the effective date of their respective acquisition.
(3) Pro Forma financial data give effect to the completed and pending
acquisitions that are described in Unaudited Pro Forma Combined Financial
Statements, as if they had all occurred at January 1, 1996. Such results
are not necessarily indicative of the results the Company would have
obtained had these events actually occurred on January 1, 1996.
(4) Includes a decrease of $6.6 million and $7.3 million for the Pro Forma As
Adjusted nine months ended September 30, 1996 and 1997, respectively, for
pro forma reductions in salaries, bonuses and benefits to former owners of
the GroupMAC Companies to which they have agreed prospectively.
(5) Represents a non-recurring, non-cash compensation expense related to the
reverse acquisition of GroupMAC Parent during the seven months ended
September 30, 1997, which is excluded in the Pro Forma As Adjusted nine
months ended September 30, 1997.
(6) Represents expenses for the formation and build-up of corporate management
and infrastructure.
(7) Consists of amortization recorded or to be recorded, as a result of the
acquisition of GroupMAC Companies, over a 40-year period and computed on
the basis described in the Notes to the Unaudited Pro Forma Combined
Financial Statements.
(8) Includes the elimination of historical interest expense related to the
Original Credit Agreement and the assumed debt of the GroupMAC Companies
resulting from the payoff of such debt with a portion of the proceeds of
the Offering. Offsetting this reduction is interest expense related to the
notes issued to fund the S Corporation Distributions discussed in the Notes
to Unaudited Pro Forma Combined Financial Statements.
(9) Includes the incremental provision for federal and state income taxes
relating to the compensation differential and all other pro forma
adjustments, as well as income taxes on S Corporation earnings and the
historical tax provisions of the GroupMAC Companies.
(10) Computed on the basis described in Note 4 of Notes to Unaudited Pro Forma
Combined Financial Statements.
RISK FACTORS
An investment in the shares of Common Stock involves significant risks that a
potential investor should consider carefully. See "Risk Factors" beginning on
page 9 for certain information that should be considered by prospective
purchasers of the Common Stock offered hereby.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The Company has previously acquired the Pre-Offering Companies and will
acquire the Offering Acquisition Companies simultaneously with the closing of
the Offering. The first and largest acquisition made by the Company was that of
Airtron, Inc. ("Airtron"). For accounting purposes, this transaction was
accounted for as a reverse acquisition, as if Airtron acquired the GroupMAC
Parent (Group Maintenance America Corp. parent only), because the former
shareholders of Airtron owned a majority of GroupMAC Parent's common stock upon
consummation of the transaction. As such, the summary historical financial data
set forth below as of and for the three-year period ended February 28, 1997
have been derived from the financial statements of Airtron, which have been
audited by KPMG Peat Marwick LLP, independent public accountants. The Financial
Statements of GroupMAC Parent and the Pre-Offering Companies are included in
the Financial Statements from their respective dates of acquisition. The
historical balance sheet data as of June 30, 1997 include A-ABC Appliance, Inc.
("A-ABC") and A-1 Appliance & Air Conditioning, Inc. ("A-1" and, together with
A-ABC, "A-ABC/A-1"), Hallmark Air Conditioning, Inc. ("Hallmark") and K&N
Plumbing, Heating and Air Conditioning, Inc. ("K&N"), which were acquired
effective June 1, 1997, and Charlie Crawford, Inc. (d/b/a Charlie's Plumbing)
("Charlie's"), Costner Brothers, Inc. ("Costner"), AA JARL, Inc. (d/b/a Jarrell
Plumbing) ("Jarrell") and the residential service assets of Way Service, Inc.
("Way Residential"), which were acquired effective June 30, 1997.
The summary pro forma financial data of the Company as of and for the six
months ended June 30, 1996 and 1997 and the year ended December 31, 1996 are
derived from the Unaudited Pro Forma Combined Financial Statements of the
Company that appear elsewhere in this Prospectus. The pro forma financial data
listed below present certain information for the Company, as adjusted for (i)
the effects of the acquisitions of the GroupMAC Companies and (ii) the effects
of certain pro forma adjustments to the historical financial statements of the
GroupMAC Companies which are directly related to these acquisitions. The pro
forma as adjusted financial data give effect to consummation of the Offering
and the application of the net proceeds therefrom. The pro forma financial data
of the Company do not purport to represent what the Company's results of
operations or financial position actually would have been had these events, in
fact, occurred on the date or at the beginning of the period indicated, nor are
they intended to project the Company's results of operations or financial
position for any future date or period.
The data presented below should be read in conjunction with the Selected
Historical and Pro Forma Financial Data, Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Financial Statements and
the related notes thereto and the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere herein.
7
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
-------------------------------
FISCAL YEARS ENDED SIX MONTHS ENDED
FEBRUARY 28 OR 29, JUNE 30,
-------------------------- DECEMBER 31, -----------------
1995 1996 1997 1996(2) 1996(2) 1997(2)
------- ------- ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA(1):
Revenues................ $72,226 $73,765 $81,880 $307,507 $151,396 $157,941
Gross Profit............ 21,766 21,091 23,374 71,596 33,479 36,582
Selling, General and
Administrative
Expenses(3)............ 20,282(4) 17,615 19,811 48,953(5) 24,068 26,978(6)
Goodwill
Amortization(7)........ -- -- -- 1,891 946 946
------- ------- ------- -------- -------- --------
Income from Operations.. 1,484 3,476 3,563 20,752 8,465 8,658
Interest Income
(Expense), Net......... 76 68 89 154 39 181
Other Income, Net....... 140 246 256 297 240 508
------- ------- ------- -------- -------- --------
Income Before Income Tax
Provision.............. 1,700 3,790 3,908 21,203 8,744 9,347
Income Tax Provision.... 911 1,651 1,572 9,237 3,876 4,117
------- ------- ------- -------- -------- --------
Net Income.............. $ 789 $ 2,139 $ 2,336 $ 11,966 $ 4,868 $ 5,230
======= ======= ======= ======== ======== ========
Net Income Per Share.... $ .59 $ .24 $ .26
======== ======== ========
Weighted Average Shares
Outstanding(8)......... 20,163 20,163 20,163
======== ======== ========
OTHER DATA:
EBITDA(9)............... $ 1,853 $ 3,960 $ 4,027 $ 26,061 $ 11,132 $ 11,843
======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(2)
-------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.................... $ 5,875 $ 10,214 $ 9,457
Working Capital.............................. 7,425 (13,359) 29,303
Total Assets................................. 64,942 174,284 173,330
Total Debt................................... 31,045 46,022 2,107
Preferred Stock.............................. 17,121 19,271 --
Shareholders' Equity......................... (10,998) 25,468 118,618
</TABLE>
- -------
(1) Concurrent with the Offering, the Company intends to change its fiscal year
end from February 28 to December 31.
(2) Pro forma financial data give effect to the completed and pending
acquisitions that are described in Unaudited Pro Forma Combined Financial
Statements, as if they had occurred at January 1, 1996 for the Income
Statement Data and on June 30, 1997 for the Balance Sheet Data. Pro forma
as adjusted data give effect to a reduction in interest expense as a result
of reductions in indebtedness upon application of a portion of the net
proceeds to the Company from the Offering and the redemption of preferred
stock.
(3) Reflects a decrease of $11.1 million, $4.2 million and $5.2 million for the
year ended December 31, 1996, six months ended June 30, 1996 and 1997,
respectively, for pro forma reductions in salaries, bonuses and benefits to
former owners of the GroupMAC Companies to which they have agreed
prospectively. Also excludes non-recurring, non-cash compensation expense
of $7.0 million related to the reverse acquisition of GroupMAC Parent
during the second quarter of 1997.
(4) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(5) Includes $0.5 million of expenses for the formation and build-up of
corporate management and infrastructure.
(6) Includes $1.6 million of expenses for the formation and build-up of
corporate management and infrastructure.
(7) Consists of amortization recorded or to be recorded as a result of the
acquisition of GroupMAC Companies over a 40-year period and computed on the
basis described in the Notes to the Unaudited Pro Forma Combined Financial
Statements.
(8) Computed on a basis described in Note 4 of Notes to Unaudited Pro Forma
Combined Financial Statements.
(9) Represents earnings before interest, taxes, depreciation and amortization
("EBITDA"). Based on its experience in the industry, the Company believes
that EBITDA is an important tool for measuring the performance of companies
in the industry (including potential acquisition targets) in several areas
such as liquidity, operating performance and leverage. In addition, lenders
use EBITDA as a criterion in evaluating companies in the industry and the
Company's financing arrangement contains covenants in which EBITDA is used
as a measure of financial performance. The EBITDA measure for the Company
may not be consistent with similarly titled measures for other companies.
EBITDA should not be considered as an alternative to operating or net
income (as determined in accordance with GAAP) as an indicator of the
Company's performance or to cash flow from operations (as determined in
accordance with GAAP) as a measure of liquidity. See the comparative
historical statements of cash flows included herein and "Management's
Discussion of Financial Condition and Results of Operations" and
"--Liquidity and Capital Resources" for discussion of other measures of
performance determined in accordance with GAAP and the Company's sources
and applications of cash flow.
8
<PAGE>
SUMMARY INDIVIDUAL GROUPMAC COMPANIES FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR(1) JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Group Maintenance America
Corp. and Subsidiaries
(Formerly Airtron)(2)
Revenues.................... $ 72,226 $ 73,765 $ 81,880 $ 37,127 $ 38,676
Gross Profit................ 21,766 21,091 23,374 10,209 10,863
Income from Operations...... 1,484 3,476 3,563 739 1,039
MacDonald-Miller
Revenues.................... $ 39,534 $ 45,508 $ 66,059 $ 36,382 $ 38,836
Gross Profit................ 7,278 8,581 9,686 4,792 5,385
Income from Operations...... 1,190 1,243 2,054 1,086 1,597
Masters
Revenues.................... $ 30,327 $ 35,160 $ 39,826 $ 18,279 $ 19,318
Gross Profit................ 2,309 3,414 3,972 1,640 1,861
Income from Operations...... 645 1,041 1,488 631 664
K&N(2)
Revenues.................... $ 21,458 $ 22,709 $ 24,279 $ 11,893 $ 12,355
Gross Profit................ 2,615 2,359 3,574 1,460 1,693
Income from Operations...... 340 (119) 936 111 88
Other Residential Services (11
companies)(2)(3)
Revenues.................... $ 38,481 $ 43,216 $ 48,964 $ 23,255 $ 24,886
Gross Profit................ 13,084 15,679 18,336 8,493 10,087
Income from Operations...... 1,652 1,469 1,830 411 1,810
Other Commercial Services (9
companies)(3)
Revenues.................... $ 33,208 $ 38,476 $ 46,499 $ 24,460 $ 23,870
Gross Profit................ 9,434 10,863 12,654 6,885 6,693
Income from Operations...... 1,765 1,734 2,287 2,182 1,495
GroupMAC Parent(4)
Revenues.................... $ -- $ -- $ -- $ -- $ --
Gross Profit................ -- -- -- -- --
Income from Operations...... -- -- (724) -- (9,384)
Total
Revenues.................... $235,234 $258,834 $307,507 $151,396 $157,941
Gross Profit................ 56,486 61,987 71,596 33,479 36,582
Income (loss) from
Operations................. 7,076 8,844 11,434 5,160 (2,691)
Pro Forma Income from
Operations................. 20,752 8,465 8,658
</TABLE>
- -------
(1) Several of the individual GroupMAC Companies have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the Offering.
(2) The operating results of A-ABC/A-1, Hallmark and K&N include the activity
of each of these companies for the six months ended June 30, 1997, although
these companies were acquired, for accounting purposes, by Airtron on June
1, 1997. A-ABC/A-1 and Hallmark results are included in the Other
Residential Services group. Airtron results include Airtron on a stand
alone basis without inclusion of the results of any acquired companies.
(3) The remainder of the GroupMAC Companies are classified by their primary
revenue generating category.
(4) GroupMAC Parent's operating results include the six months ended June 30,
1997, although the company was acquired, for accounting purposes, by
Airtron in May 1997. Includes non-recurring compensation expense of $7.0
million related to the reverse acquisition of GroupMAC Parent.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should consider carefully the
following factors before deciding to invest in the Common Stock. To the extent
this Prospectus contains certain forward-looking statements, actual results
could differ materially from those projected in the forward-looking statements
as a result of any number of factors, including the risk factors set forth
below and elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY
The Company has conducted limited operations to date. See "The Company."
Prior to their acquisition by the Company, the Pre-Offering Companies operated
as separate, independent businesses. Further, the Offering Acquisition
Companies have operated, and will continue to operate prior to the closing of
the Offering, as separate, independent businesses. The Company will rely on
the separate systems of the GroupMAC Companies for the foreseeable future.
There can be no assurance that the Company will be able to integrate the
operations of the GroupMAC Companies successfully or to institute the
necessary systems and procedures, including accounting and financial reporting
systems, to manage the combined enterprise on a profitable basis. The
Company's management group has been assembled only recently, and a significant
number of the Company's management group has not worked in the HVAC, plumbing
and electrical service industries prior to joining the Company. There can be
no assurance that the management group will be able to manage the combined
entity or to implement effectively the Company's operating strategy, internal
growth strategy and acquisition program. The pro forma and combined historical
financial results of the GroupMAC Companies cover periods when the GroupMAC
Companies were not under common control or management and may not be
indicative of the Company's future financial or operating results. The
inability of the Company to integrate and manage the GroupMAC Companies and
such additional businesses as the Company may acquire as a cohesive, efficient
enterprise or to eliminate unnecessary duplication may have a material adverse
effect on the business, financial condition and results of operations of the
Company.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring residential and
commercial contracting businesses that install or maintain, repair and replace
HVAC, plumbing, electrical and other systems and equipment in existing homes
and commercial buildings and in homes and commercial buildings under
construction in its existing and new markets. The Company's acquisition
strategy presents risks that, singly or in any combination, could materially
adversely affect the Company's business, financial condition and results of
operations. These risks include the possibility of the adverse effect on
existing operations of the Company from the diversion of management attention
and resources to acquisitions, the possible loss of acquired customer bases
and key personnel, including service technicians and managers, possible
adverse effects on earnings resulting from amortization of goodwill created in
purchase transactions and the contingent and latent risks associated with the
past operations and other unanticipated problems arising in the acquired
businesses. The success of the Company's acquisition strategy will depend on
the extent to which it is able to acquire, successfully absorb and profitably
manage additional businesses, and no assurance can be given that the Company's
strategy will succeed. The increasing competition for suitable acquisition
targets could limit the Company's ability to locate suitable acquisition
targets and could increase the cost of purchasing such acquisition targets.
See "Business--Acquisition Strategy."
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
The Company historically has financed capital expenditures and acquisitions
primarily through the issuance of equity securities, secured bank borrowings
and internally generated cash flow. The timing, size and success of the
Company's acquisition efforts and the associated capital commitments cannot be
readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for all or a
10
<PAGE>
substantial portion of the consideration to be paid. If the Common Stock does
not maintain a sufficient market value, or if potential acquisition candidates
are otherwise unwilling to accept Common Stock as part of the consideration
for the sale of their businesses, the Company may be required to utilize more
of its cash resources, if available, in order to initiate and maintain its
acquisition program. The Company will have little, if any, net proceeds of
this Offering remaining for future acquisitions and working capital after
payment of Offering expenses, any indebtedness incurred or assumed by the
Company and the cash portion of the purchase price for the Offering
Acquisition Companies. There can be no assurance the Company will be able to
raise sufficient capital at reasonable rates, if at all. If the Company does
not have sufficient cash resources, its growth could be limited unless it is
able to obtain additional capital through debt or equity financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EXPOSURE TO DOWNTURNS IN HOUSING STARTS OR NEW COMMERCIAL CONSTRUCTION
A substantial portion of the Company's business involves installation of
HVAC and/or plumbing systems in newly constructed residences and commercial
buildings. The extent to which the Company is able to maintain or increase
revenues from new installation services in the residential market will depend
on the levels of housing starts from time to time in the geographic markets in
which it operates and likely will reflect the cyclical nature of the housing
industry. The housing industry is affected significantly by changes in general
and local economic conditions, such as employment and income levels, the
availability and cost of financing for home buyers (including the continued
deductibility of mortgage interest in determining federal income tax),
consumer confidence and housing demand. The level of new commercial
installation services is similarly affected by fluctuations in the level of
new construction of commercial buildings in the markets in which the Company
operates, due to local economic conditions, changes in interest rates and
other similar factors. Downturns in the levels of housing starts and/or new
commercial construction could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonal and Cyclical Nature of Business."
FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's operations are subject to economic cycles and seasonal
variations. General and local economic conditions can cause fluctuations in
demand for the Company's services. Except in the Southeastern and Southwestern
United States, the demand for new installations of HVAC systems can be
substantially lower during the winter months. Demand for HVAC services,
especially in the residential sector, is generally higher in the second and
third calendar quarters. Commercial HVAC maintenance, repair and replacement
service is subject to seasonality as well. The Company expects that its
revenues and operating results generally will be lower in its first and fourth
calendar quarters. The HVAC, plumbing and electrical service industries are
also subject to fluctuations caused by periods of inclement weather. Prolonged
climate or weather conditions may cause unpredictable fluctuations in
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonal and Cyclical Nature of
Business."
AVAILABILITY OF TECHNICIANS
The Company's ability to provide high-quality HVAC, plumbing and electrical
services on a timely basis requires an adequate supply of skilled technicians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain the
skilled technicians necessary to meet the Company's service requirements. From
time to time, there are shortages of qualified technicians, and there can be
no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor
expenses will not increase as a result of a shortage in the supply of skilled
technicians or that the Company will not have to curtail its planned internal
growth as a result of labor shortages. See "Business--Centralized Support
Services--Employee Screening, Training and Development."
11
<PAGE>
RISKS ASSOCIATED WITH DEVELOPMENT, IMPLEMENTATION, AND INTEGRATION OF
OPERATING SYSTEMS AND POLICIES
As a rapidly growing provider of HVAC, plumbing and electrical services, the
Company is faced with the development, implementation and integration of
Company-wide policies and systems related to its operations. The Company plans
to implement and integrate certain information and operating systems and
procedures for the GroupMAC Companies including, but not limited to,
accounting systems, employment and human resources policies, uniform
purchasing programs and certain centralized marketing programs. Each of the
GroupMAC Companies and companies to be acquired in the future may need to
modify certain systems and policies they have utilized historically to
implement the Company's systems and policies. As a result of the Company's
decentralized operating strategy, there can be no assurance that the Company's
operating systems and policies will be successfully implemented at the
subsidiary level or that the Company will be successful in monitoring the
performance of the subsidiaries. The Company may experience delays,
complications and expenses in implementing, integrating and operating such
systems, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Operating Strategy."
FACTORS AFFECTING INTERNAL GROWTH
The Company's ability to increase the revenues of the GroupMAC Companies and
any subsequently acquired company will be affected by various factors,
including demand for HVAC, plumbing and electrical services, the level of new
construction, the Company's ability to expand the range of services offered to
customers of individual GroupMAC Companies and other acquired businesses, the
Company's ability to develop national accounts and other marketing programs in
order to attract new customers and the Company's ability to attract and retain
a sufficient number of qualified technicians and other necessary personnel.
Many of these factors are beyond the control of the Company, and there can be
no assurance that the Company's operating and internal growth strategies will
be successful or that it will be able to generate cash flow adequate for its
operation and to support internal growth. Furthermore, there can be no
assurance that management can integrate acquired companies and reduce overhead
expenses. See "Business--Operating Strategy."
VALUATION OF ACQUISITIONS
The initial public offering price will be determined based on negotiations
between the Company and the representatives of the Underwriters, and the
factors which will be considered in determining such price include, in
addition to prevailing market conditions, the expected results of operations
of the Company, estimates of the business potential and earnings prospects of
the Company and the economy as a whole. See "Underwriting." The valuation of
the Company has not been established on a company-by-company basis, and no
third party appraisals of the GroupMAC Companies were obtained by the Company
for purposes of the Offering nor has a fairness opinion been obtained. A
valuation of the Company determined solely by appraisal of the individual
GroupMAC Companies would likely result in a different valuation of the Company
than that reflected by the initial public offering price of the shares of
Common Stock offered hereby. At the initial public offering price, the
aggregate consideration related to the Pre-Offering and Offering Acquisition
Companies will be approximately $204.6 million, which will consist of $123.7
million in Common Stock, $19.3 million in Preferred Stock (valued at its
redemption value of $1.00 per share) and $61.6 million in cash. There can be
no assurance that the consideration paid or to be paid by the Company for the
GroupMAC Companies accurately reflects the value of the assets of these
companies or that the percentage of Common Stock of the Company owned by the
former owners of the GroupMAC Companies reflects the value of the assets of
the GroupMAC Companies.
PROCEEDS OF OFFERING PAYABLE FOR EXISTING OBLIGATIONS AND TO AFFILIATES
The Company will use the net proceeds of the Offering to repay indebtedness
incurred to fund the cash portion of the consideration paid to acquire the
Pre-Offering Companies, to redeem warrants and preferred stock issued in
connection with the acquisition of the Pre-Offering Companies, to repay debt
assumed and certain obligations resulting from the acquisition of the GroupMAC
Companies and to fund the cash portion of the consideration to be paid to
acquire the Offering Acquisition Companies. Only a small portion, if any, of
the net
12
<PAGE>
proceeds of the Offering will be available to meet the Company's cash
requirements following the closing of the Offering. In connection with the
closing of the purchase of the Offering Acquisition Companies, the Company
will pay, subject to adjustment, approximately $28.9 million in cash for the
stock of the Offering Acquisition Companies. The Company will also use $31.2
million to repay bank debt incurred to finance the acquisition of the Pre-
Offering Companies, approximately $19.3 million to redeem warrants and
preferred stock issued in connection with the acquisition of the Pre-Offering
Companies and approximately $13.4 million to repay debt assumed and certain
obligations resulting from the acquisition of the GroupMAC Companies. Some of
the warrants and preferred stock redeemed with the proceeds of the Offering
and the stock or assets purchased with the proceeds of the Offering are
beneficially owned by individuals who are or who may become directors of the
Company and/or executive officers of GroupMAC Companies. See "Use of
Proceeds," "The Acquisitions" and "Related Party Transactions."
COMPETITION
The HVAC, plumbing and electrical service industries are highly competitive
and are served principally by small, owner-operated private companies. Certain
of these smaller competitors have lower overhead cost structures and may be
able to provide their services at lower rates than the Company. The Company
believes the HVAC, plumbing and electrical service industries are subject to
rapid consolidation on both a national and a regional scale. Three companies
have completed initial public offerings, have begun consolidation efforts and
have entered into some of the Company's markets. Other companies, including
unregulated affiliates of electric and gas public utilities and HVAC equipment
manufacturers, may enter the industry. These consolidators and other entrants
may have greater financial resources and name recognition than the Company and
may be willing to pay higher prices than the Company for the same
opportunities. Consequently, the Company may encounter significant competition
in its efforts to achieve its growth objectives. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and the senior management of the GroupMAC Companies, and the Company
will depend on the senior management of significant businesses it acquires in
the future. The business of the Company could be affected adversely if any of
these persons does not continue in his or her management role with the Company
or an acquired business and the Company is unable to attract and retain
qualified replacements. See "Business--Centralized Support Services--Employee
Screening, Training and Development" and "Management."
REGULATION
HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, (i) laws and regulations implementing the
federal Clean Air Act, as amended (the "Clean Air Act"), relating to minimum
energy efficiency standards of HVAC systems and the production, servicing and
disposal of certain ozone depleting refrigerants used in such systems and (ii)
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), which can impose strict, joint and several liability on past and
present owners or operators of facilities at, from, or to which a release of
hazardous substances has occurred, on parties who generated hazardous
substances that were released at such facilities and on parties who arranged
for the transportation of hazardous substances to such facilities. In
connection with its entry into new markets, the Company may become subject to
compliance with additional regulations, and there can be no assurance that the
regulatory environment in which the Company operates will not change
significantly in the future. Various local, state and federal laws and
regulations, including, but not limited to, laws and regulations implementing
the Clean Air Act impose licensing standards on technicians who service
heating and air conditioning units. While the installers and technicians
employed by the Company are duly certified by applicable local, state and
federal agencies and have been able to meet or exceed such standards to date,
there can be no assurance that they will be able to meet future standards. In
some states, warranties provided for in the Company's service agreements may
be deemed insurance contracts by applicable state insurance regulatory
agencies thereby subjecting the Company and the service agreements to the
insurance laws and regulations of such state. See "Business--Governmental
Regulation and Environmental Matters."
13
<PAGE>
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Upon the closing of the Offering, the executive officers, directors and
certain founding shareholders of the Company will beneficially own in the
aggregate approximately 28.2% of the outstanding Common Stock. Accordingly,
such persons will have substantial influence on the Company, which influence
might not be consistent with the interests of other shareholders, and on the
outcome of any matters submitted to the Company's shareholders for approval.
In addition, although there is no current agreement, understanding or
arrangement for these shareholders to act together on any matter, these
shareholders may have economic and business reasons to act together, and would
be in a position to execute significant influence over the affairs of the
Company if they were to act together in the future. If these persons were to
act in concert, they might, as a practical matter, be able to exercise control
over the Company's affairs, including the election of the entire Board of
Directors and (subject to Article Thirteen of the Texas Business Corporation
Act (the "TBCA") which applies to transactions between the Company and certain
interested persons) any matter submitted to a vote of stockholders. See
"Security Ownership of Certain Beneficial Owners and Management."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Upon the closing of the Offering, 19,962,527 shares of Common Stock will be
outstanding. The 7,500,000 shares sold in this Offering (other than shares
that may be purchased by affiliates of the Company) will be freely tradable.
Due to the high number of beneficial owners in the employee stock ownership
plan of MacDonald-Miller Industries, Inc. ("MacDonald-Miller"), the Company
registered under the Securities Act of 1933, as amended (the "Securities
Act"), and proposes to issue, 643,064 shares in connection with the
acquisition of MacDonald-Miller. The remaining shares outstanding may be
resold publicly only following their effective registration under the
Securities Act or pursuant to an available exemption (such as provided by Rule
144 following a holding period for previously unregistered shares) from the
registration requirements of the Securities Act. The holders of 3,575,586
shares of Common Stock have the right (subject to minimum participation
requirements) to require the Company to register such shares pursuant to the
Securities Act for the purpose of allowing them to effect a public offering of
all or a portion of such shares (a "Demand Registration"), and such holders
and substantially all of the other holders of Common Stock outstanding on the
date hereof also have the right to require the Company to register their
shares of Common Stock under the Securities Act in connection with a public
offering of Common Stock contemplated by the Company (a "Piggyback
Registration"). The number of Demand Registrations that may be requested is
limited, and the Company will not be obligated to effect a Demand Registration
within 60 days prior to the proposed filing date of a registration statement
relating to an offering by the Company of its securities (with certain
exceptions) or within 120 days after the effective date of such a registration
statement. Further, the Company may delay a Demand Registration for up to 120
days if the Company determines that such registration would be detrimental to
the Company. In connection with a Piggyback Registration involving an
underwritten offering, the number of shares to be registered by selling
shareholders may be limited or eliminated entirely if the managing underwriter
determines marketing factors require a limitation on the number of shares to
be underwritten. See "Shares Eligible for Future Sale." The holders of Demand
Registration rights have agreed with the Company and the Underwriters not to
exercise their respective demand rights for the two year period following the
Offering except for Gordon A. Cain who has agreed not to exercise his demand
rights for one year. In addition, such holders and the holders of Common Stock
issued in connection with the acquisition of the GroupMAC Companies have
agreed with the Company that they generally will not sell, transfer or
otherwise dispose of any of their shares for one year following the date of
acquisition of such shares and for one additional year will limit sales to no
more than 36% of their holdings. Sales made pursuant to Rule 144 must comply
with its applicable volume limitations and other requirements. At the date of
this Prospectus, 1,211,200 "restricted" shares of Common Stock are eligible
for resale pursuant to Rule 144, subject to the volume, manner of sale and
other limitations thereof. The remaining "restricted" shares will become
eligible for resale pursuant to Rule 144 from time to time thereafter.
Upon the closing of the Offering, the Company also will have outstanding
options and warrants to purchase up to a total of 2,887,842 shares of Common
Stock, of which only warrants and options to purchase 731,661
14
<PAGE>
shares will be exercisable within 60 days after the closing of the Offering.
The Company intends to register all the shares subject to these options and
warrants under the Securities Act for public resale.
The Company, its directors and executive officers and certain other
shareholders have agreed not to offer or sell any shares for a period of 180
days following the date of this Prospectus without the prior written consent
of The Robinson-Humphrey Company, LLC, except (A) that the Company may issue
Common Stock in the Offering, in connection with acquisitions generally, and
pursuant to the exercise of stock options which are either (i) outstanding on
the date of this Prospectus, (ii) issued under the Company's 1997 Stock Awards
Plan or (iii) issued under the Company's stock option plan for non-management
employees, and (B) that such directors, executive officers and shareholders
may sell Common Stock pursuant to a cashless exercise of such stock options or
make a bona fide gift of Common Stock provided the donee agrees to be bound by
the terms of the donor's lockup agreement.
The Company intends to continue to acquire companies using Common Stock as
part of the consideration. Accordingly, the Company intends to register
7,000,000 additional shares of Common Stock under the Securities Act during
the fourth quarter of 1997 for its use in connection with future acquisitions.
These shares generally will be freely tradable after their issuance by persons
not affiliated with the Company unless the Company contractually restricts
their resale.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
RESTRICTIONS ON DIVIDENDS; DEPENDENCE ON SUBSIDIARIES
The Company will conduct its operations through subsidiaries, including
substantially all of the Pre-Offering Companies and the Offering Acquisition
Companies, and is therefore dependent upon the cash flow of and the transfer
of funds by those subsidiaries to the Company in the form of loans, dividends
or otherwise to meet its financial obligations. Each GroupMAC Company and any
future subsidiary of the Company will be distinct legal entities and will have
no obligation, contingent or otherwise, to transfer funds to the Company. The
Company's ability to pay dividends on the Common Stock will be restricted by
the terms of the proposed $75 million bank credit facility (the "Bank Credit
Agreement") and could be restricted by the terms of subsequent financings and
subsequent series of Preferred Stock that may be issued in future
transactions. See "Description of Capital Stock" and "Description of Capital
Stock--Common Stock." Additionally, the ability of the GroupMAC Companies to
pay dividends to the Company is limited by the terms of the Bank Credit
Agreement. See "Description of Bank Credit Agreement."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which will be determined by negotiation
between the Company and representatives of the Underwriters, may not be
indicative of the price at which the Common Stock will trade after the
Offering. See "Underwriting" for the factors considered in determining the
initial public offering price. The Common Stock has been approved for listing
on the NYSE, subject to official notice of issuance, but no assurance can be
given that an active trading market for the Common Stock will develop or, if
it developed, that it will continue after the Offering. The market price of
the Common Stock after the Offering may be subject to significant fluctuations
from time to time in response to numerous factors, including variations in the
reported financial results of the Company and changing conditions in the
economy in general or in the Company's industry in particular. In addition,
stock markets generally experience significant price and volume volatility
from time to time which may affect the market price of the Common Stock for
reasons unrelated to the Company's performance.
POTENTIAL ANTI-TAKEOVER EFFECTS
Provisions of the Company's Articles of Incorporation and Bylaws and the
TBCA may have the effect of delaying, discouraging, inhibiting, preventing or
rendering more difficult an attempt to obtain control of the Company by means
of a tender offer, business combination, proxy contest or otherwise. These
provisions include the authorization in the Company's Articles of
Incorporation of preferred stock having such preferences, powers and relative,
participating, optional and other rights (including preferences over the
Common Stock respecting dividends, distributions and voting rights) as the
Board of Directors may determine, classification of the Board
15
<PAGE>
of Directors, a TBCA restriction on the ability of shareholders to take
actions by written consent and a TBCA provision imposing restrictions on
business combinations with certain interested parties. See "Description of
Capital Stock."
IMMEDIATE, SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $11.85
per share and (ii) may experience further dilution in that value from
issuances of Common Stock in connection with future acquisitions. See
"Dilution."
ASSET ENCUMBRANCE
The obligations of the Company under the Bank Credit Agreement are secured
by a first priority security interest on the accounts receivable and inventory
of the Company and its material subsidiaries and all the capital stock of its
domestic subsidiaries. In addition, borrowings under the Bank Credit Agreement
will be guaranteed by the material GroupMAC Companies, and any future material
subsidiaries. If the Company becomes insolvent or is liquidated, or if there
were a breach of the restrictions in the Bank Credit Agreement so as to result
in a default thereunder, or if the Company were unable to repay its borrowings
thereunder, lenders under the Bank Credit Agreement could declare all amounts
outstanding thereunder to be due and payable and the obligations of the
lenders to make further extensions of credit could be terminated. The lenders
under the Bank Credit Agreement also would be entitled to proceed against the
collateral securing such indebtedness. Accordingly, such lenders would have a
prior claim on certain assets of the Company and its subsidiaries. See
"Description of Bank Credit Agreement."
16
<PAGE>
THE COMPANY
The Company was founded in 1996 to create the leading nationwide provider of
HVAC, plumbing and electrical services to residential and commercial
customers. The Company has completed the purchase of 11 Pre-Offering Companies
and has definitive agreements to acquire an additional 13 Offering Acquisition
Companies upon the closing of the Offering. The initial capitalization of the
Company was provided through private equity capital and a $35 million
acquisition and working capital borrowing facility. This initial financing
allowed the Company to acquire the Pre-Offering Companies, including Airtron,
a residential HVAC service company with new installation and maintenance,
repair and replacement services in 14 cities in six states. The Company
believes Airtron, with revenues in fiscal 1996 of $81.9 million, was the
largest independent residential HVAC service company in the United States. The
combined 1996 revenue of the Pre-Offering Companies was $138.8 million. With
the purchase of the 13 Offering Acquisition Companies, the Company will have
approximately 2,860 employees at operations in 37 cities in 21 states, with
combined 1996 revenues of $307.5 million, and will be among the largest
providers of HVAC, plumbing and electrical services in the United States.
For a description of the transactions pursuant to which the businesses of
the Pre-Offering Companies were acquired and the Offering Acquisition
Companies will be acquired, see "The Acquisitions." The GroupMAC Companies are
described below.
<TABLE>
<CAPTION>
1996 REVENUES YEAR
PRE-OFFERING COMPANIES: ($ IN 000'S)(1) FOUNDED HEADQUARTERS SITE PRIMARY SERVICES
- ----------------------- --------------- ------- -------------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Airtron(2)....... $81,880 1970 Dayton, OH Residential & Commercial HVAC
K&N(2)........... 24,279 1978 Arlington, TX Residential Plumbing & HVAC
A-ABC/A-1(2)..... 8,546 1976 Dallas, TX Residential HVAC & Plumbing
Sibley........... 6,962 1974 Memphis, TN Commercial HVAC
Hallmark(2)...... 6,516 1951 Houston, TX Residential & Commercial HVAC
Charlie's........ 3,058 1979 Houston, TX Commercial & Residential Plumbing
Costner.......... 3,042 1985 Rock Hill, SC Residential HVAC & Electrical
Callahan
Roach(2)(3)..... 1,867 1989 Colorado Springs, CO Residential Training, Products & Publications
Jarrell.......... 1,236 1957 Houston, TX Residential Plumbing
USA.............. 763 1988 Lakewood, CO Commercial Training & Member Services
Way Residential.. 659 1977 Houston, TX Residential HVAC
--------
Total........... $138,808
--------
OFFERING ACQUISITION COMPANIES:
- ---------------------------------
MacDonald-Mill-
er(2)........... $ 66,059 1965 Seattle, WA Commercial HVAC, Plumbing & Electrical
Masters(2)....... 39,826 1986 Gaithersburg, MD Residential Plumbing & HVAC
Linford(2)....... 11,305 1960 Oakland, CA Commercial HVAC
Yale............. 10,065 1939 Minneapolis, MN Commercial HVAC
Central Caroli-
na(2)........... 8,161 1967 Greensboro, NC Residential & Commercial HVAC
Willis........... 6,781 1954 Cincinnati, OH Residential HVAC
Paul E. Smith.... 5,573 1967 Indianapolis, IN Residential Plumbing
Southeast Mechan-
ical............ 5,282 1979 Hollywood, FL Commercial HVAC
Van's............ 4,289 1965 Delray Beach, FL Residential HVAC
Arkansas
Mechanical(2)... 3,337 1988 Little Rock, AR Commercial HVAC
Mechanical(2).... 2,900 1993 Little Rock, AR Commercial HVAC
All Service...... 2,826 1990 Jacksonville, FL Commercial & Residential Electrical
Evans............ 2,295 1901 Birmingham, AL Residential Plumbing & HVAC
--------
Total........... $168,699
--------
Pro Forma Com-
bined........... $307,507
========
<CAPTION>
SOURCE OF 1996 REVENUES
-------------------------
MAINTENANCE,
NEW REPAIR AND
PRE-OFFERING COMPANIES: INSTALLATION REPLACEMENT
- ----------------------- ------------ ------------
<S> <C> <C>
Airtron(2)....... 81% 19%
K&N(2)........... 89% 11%
A-ABC/A-1(2)..... 0% 100%
Sibley........... 0% 100%
Hallmark(2)...... 0% 100%
Charlie's........ 0% 100%
Costner.......... 0% 100%
Callahan
Roach(2)(3)..... N/A N/A
Jarrell.......... 0% 100%
USA.............. N/A N/A
Way Residential.. 0% 100%
Total...........
OFFERING ACQUISITION COMPANIES:
- ----------------------------------------
MacDonald-Mill-
er(2)........... 41% 59%
Masters(2)....... 100% 0%
Linford(2)....... 0% 100%
Yale............. 28% 72%
Central Caroli-
na(2)........... 17% 83%
Willis........... 59% 41%
Paul E. Smith.... 61% 39%
Southeast Mechan-
ical............ 0% 100%
Van's............ 4% 96%
Arkansas
Mechanical(2)... 0% 100%
Mechanical(2).... 14% 86%
All Service...... 14% 86%
Evans............ 0% 100%
Total...........
Pro Forma Com-
bined........... 54% 46%
============ ============
</TABLE>
- -------
(1) Several of the individual GroupMAC Companies have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the Offering.
(2) Operates through multiple locations.
(3) Includes Callahan/Roach Products & Publications, Inc. ("CRPP") and
Callahan/Roach & Associates ("CRA" and, together with CRPP, "Callahan
Roach").
17
<PAGE>
The Pre-Offering Companies (other than Costner, Way Residential and Callahan
Roach) were acquired using a combination of cash, warrants and preferred stock
and 5,801,999 shares of Common Stock. All of the shares of preferred stock
will be redeemed for cash at the closing of the Offering. Costner and Way
Residential (effective as of June 30, 1997) and Callahan Roach (effective July
1, 1997) were acquired, and the Offering Acquisition Companies are being
acquired, for a combination of cash and 3,032,890 shares of Common Stock,
before anticipated Subchapter S distributions and purchase price adjustments.
The aggregate consideration that was paid or will be paid by the Company to
acquire the GroupMAC Companies consists of (i) approximately $61.6 million in
cash ($32.6 million for the Pre-Offering Companies and $29.0 million for the
Offering Acquisition Companies), (ii) 8,834,889 shares of Common Stock, (iii)
17,557,971 shares of preferred stock and warrants to purchase 1,713,622 shares
of preferred stock (which are currently exercisable) issued to the Pre-
Offering Companies which will be redeemed for an aggregate of $19.3 million in
cash with proceeds of the Offering and (iv) warrants and options for 609,461
shares of Common Stock (which are currently exercisable). In addition, the
Company has assumed or will assume $14.9 million of indebtedness of the
GroupMAC Companies (which will be repaid promptly in its entirety with
proceeds from the Offering). See "Use of Proceeds." Shareholders of several of
the GroupMAC Companies have the opportunity to receive additional amounts of
purchase price, payable in cash and Common Stock in 1997 and 1998, contingent
upon the occurrence of future events. The Company believes this amount will be
approximately $5 million in cash and Common Stock. Prior to the closing of the
Offering, certain of the Offering Acquisition Companies that are corporations
which have elected to be taxed under Subchapter S of the Internal Revenue Code
("S Corporations") may distribute cash and certain non-operating assets to
their shareholders in an amount not to exceed the balances of their respective
accumulated adjustment accounts.
The consideration paid or to be paid by the Company for each GroupMAC
Company was the result of arm's-length negotiations between representatives of
the Company and representatives of that company and was based generally on the
Company's evaluation of such company's operating results, assets and
capitalization. Certain shareholders and key managers of the GroupMAC
Companies were required to enter into employment agreements containing, among
other things, confidentiality and non-competition provisions.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
in the Offering are estimated to be approximately $93.2 million ($107.8
million if the over-allotment option is exercised in full) after deduction of
underwriting discounts and Offering expenses payable by the Company. The
Company plans to use $19.3 million to redeem all the outstanding warrants for
and shares of preferred stock issued in connection with the acquisition of the
Pre-Offering Companies, $28.9 million to fund the cash portion of the
consideration to be issued in connection with the acquisition of the Offering
Acquisition Companies, $31.2 million to repay bank debt incurred to finance
the acquisition of the Pre-Offering Companies and $13.4 million to repay other
debt assumed and certain obligations resulting from the acquisition of the
GroupMAC Companies, with any remaining proceeds being used for general
corporate purposes, including working capital and future acquisitions. Any net
proceeds received from the exercise of the Underwriters' over-allotment option
will be used for future acquisitions and for working capital purposes. See
"The Acquisitions," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Bank Credit Agreement."
18
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of June 30, 1997, (ii) the pro forma capitalization of the Company
as of June 30, 1997, giving effect to the acquisition of the GroupMAC
Companies, and (iii) the pro forma capitalization of the Company as of June
30, 1997, giving effect to such acquisitions and related financings, as
adjusted to reflect the application of the net proceeds from the Offering. For
a description of the adjustments, see Notes to Unaudited Pro Forma Combined
Financial Statements included elsewhere herein. This presentation should be
read in conjunction with the historical and pro forma combined financial
statements of the Company and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
(IN THOUSANDS)
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
Short-Term Debt, Including Current Maturities... $ 4,577 $14,608 $ 2,107
======= ======= ========
Long-Term Debt, Net of Current Maturities....... $26,468 $31,414 $ --
Preferred Stock: $1.00 par value, 50,000,000
shares authorized; 17,121,131 issued and
outstanding; 19,271,593 shares issued and
outstanding, pro forma......................... 17,121 19,271 --
Shareholders' Equity:
Common Stock: $.001 par value, 100,000,000
shares authorized; 8,707,998 shares issued and
outstanding; 12,462,527 shares issued and
outstanding, pro forma; and 19,962,527 shares
issued and outstanding, pro forma as
adjusted(1).................................... 9 12 20
Additional Paid-In Capital...................... 25,741 60,150 153,292
Retained Earnings (Deficit)..................... (34,694) (34,694) (34,694)
Subscriptions Receivable........................ (2,054) -- --
------- ------- --------
Total Shareholders' Equity...................... (10,998) 25,468 118,618
------- ------- --------
Total Capitalization............................ $32,591 $76,153 $118,618
======= ======= ========
</TABLE>
- --------
(1) Excludes (i) 609,461 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants issued in connection with certain
acquisitions, (ii) 378,800 shares of Common Stock issuable upon exercise
of outstanding stock options held by employees of the Company, and (iii)
an aggregate of 1,899,581 shares of Common Stock subject to options to be
granted upon consummation of the Offering at an exercise price equal to
the initial public offering price. See "Management--Option Grants" and
"--Stock Awards Plan."
DIVIDEND POLICY
The Company has not paid a dividend on Common Stock since its incorporation
and does not anticipate paying any dividends on Common Stock in the
foreseeable future because it intends to retain earnings to finance the
expansion of its business, to repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
relevant factors. The Bank Credit Agreement will restrict the payment of
dividends. See "Description of Bank Credit Agreement."
19
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company at June 30,
1997 was approximately $50.2 million, or $4.03 per share, after giving effect
to the completion of the purchase of the GroupMAC Companies and the related
financings therefor but before giving effect to the Offering. Pro forma net
tangible book value per share before the Offering represents the amount of the
Company's pro forma shareholders' equity as of June 30, 1997, less intangible
assets as of that date, after giving effect to the completion of the purchase
of the GroupMAC Companies and the related financings, divided by 12,462,527
shares of Common Stock outstanding (the pro forma number of shares of Common
Stock outstanding as of such date, after giving effect to such matters but
before giving effect to the Offering). Net tangible book value dilution per
share represents the difference between the amount per share paid by
purchasers of shares of Common Stock in the Offering and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the Offering. After giving effect to the sale of 7,500,000 shares of Common
Stock by the Company in the Offering and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
June 30, 1997 would have been $42.9 million or $2.15 per share. This
represents an immediate increase in pro forma net tangible book value of $6.18
per share to existing shareholders and an immediate dilution in pro forma net
tangible book value of $11.85 per share to purchasers of Common Stock in the
Offering. The following table illustrates the dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $14.00
Deficit in pro forma net tangible book value before the
Offering..................................................... $(4.03)
Increase in pro forma net tangible book value attributable to
the Offering................................................. 6.18
Pro forma net tangible book value after the Offering............ 2.15
------
Dilution per share to new investors............................. $11.85
======
</TABLE>
The following table shows, after giving effect to the Offering, the
difference between existing shareholders and new investors with respect to the
number of shares purchased from the Company and the total consideration and
average price per share paid to the Company, before deducting the underwriting
discounts and estimated Offering expenses (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
SHARES
PURCHASED PURCHASE
-------------- TOTAL PRICE PER
NUMBER PERCENT CONSIDERATION SHARE
------ ------- ------------- ---------
<S> <C> <C> <C> <C>
Existing shareholders.................... 12,463 62.4% $(50,202) $(4.03)
New investors............................ 7,500 37.6% 105,000 14.00
------ ----- --------
Total.................................. 19,963 100.0% $ 54,798
====== ===== ========
</TABLE>
The foregoing tables assume no exercise of outstanding options and warrants.
Upon consummation of the Offering, there will be 1,899,581 shares of Common
Stock issuable upon exercise of stock options at the price per share set forth
on the cover of this Prospectus, 474,261 shares of Common Stock issuable upon
the exercise of stock options at an average exercise price of $4.14 per share
and warrants to purchase 514,000 shares of Common Stock at an average purchase
price of $17.50 per share. See "Management--Option Grants" and "--Stock Awards
Plan."
20
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The Company has previously acquired the Pre-Offering Companies and will
acquire the Offering Acquisition Companies simultaneously with the closing of
the Offering. The first and largest acquisition made by the Company was that
of Airtron. For accounting purposes, this transaction was accounted for as a
reverse acquisition, as if Airtron acquired the GroupMAC Parent, because the
former shareholders of Airtron owned a majority of GroupMAC Parent's Common
Stock upon consummation of the transaction. As such, the selected historical
financial data set forth below as of and for the three-year period ended
February 28, 1997 have been derived from the financial statements of Airtron,
which have been audited by KPMG Peat Marwick LLP, independent public
accountants. The financial statements of GroupMAC Parent and the Pre-Offering
Companies are included in the Financial Statements from their respective dates
of acquisition. The selected historical financial data set forth below as of
and for each of the four month periods ended June 30, 1996 and 1997 were
derived from the financial statements of Airtron. In addition to reflecting
the transaction discussed above, the historical balance sheet data as of June
30, 1997 include A-ABC/A-1, Hallmark and K&N, which were acquired effective
June 1, 1997, and Charlie's, Costner, Jarrell and the assets of Way
Residential, which were acquired effective June 30, 1997. The operations of
all of these companies have been included in the historical income statement
data from their respective dates of acquisition. In the opinion of the
Company's management, the selected historical financial data of the Company as
of and for the four months ended June 30, 1997 and 1996 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the
four months ended June 30, 1997 should not be regarded as indicative of the
results that may be expected for the full year.
The selected pro forma financial data of the Company as of and for the six
months ended June 30, 1996 and 1997 and the year ended December 31, 1996 are
derived from the Unaudited Pro Forma Combined Financial Statements of the
Company that appear elsewhere in this Prospectus. The pro forma financial data
listed below present certain information for the Company, as adjusted for (i)
the effects of the acquisitions of the GroupMAC Companies and (ii) the effects
of certain pro forma adjustments to the historical financial data statements
of the GroupMAC Companies directly related to those acquisitions. The pro
forma as adjusted financial data give effect to the consummation of the
Offering and the application of the net proceeds therefrom, as if they had all
occurred on the first day of each respective period. The pro forma financial
data of the Company do not purport to represent what the Company's results of
operations or financial position actually would have been had these events, in
fact, occurred on the date or at the beginning of the period indicated, nor
are they intended to project the Company's results of operations or financial
position for any future date or period.
The data presented below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Financial Statements and the related notes thereto and the Unaudited Pro Forma
Combined Financial Statements and the notes thereto included elsewhere herein.
21
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA AS
FISCAL YEAR ENDED FEBRUARY 28 OR 29, AS ADJUSTED(2) FOUR MONTHS ENDED ADJUSTED SIX MONTHS
(1) YEAR ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------ DECEMBER 31, ------------------- ----------------------
1993 1994 1995 1996 1997 1996 1996 1997(3) 1996(2) 1997(2)
------- ------- ------- ------- ------- -------------- ---------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Revenues........ $54,552 $66,281 $72,226 $73,765 $81,880 $307,507 $25,957 $31,086 $151,396 $157,941
Gross Profit.... 15,565 18,977 21,766 21,091 23,374 71,596 7,031 8,399 33,479 36,582
Selling, General
and
Administrative
Expenses(4).... 12,648 15,760 20,282(5) 17,615 19,811 48,953(6) 5,461 13,136 24,068 26,978(7)
Goodwill Amorti-
zation(8)...... -- -- -- -- -- 1,891 -- 31 946 946
------- ------- ------- ------- ------- -------- ------- ------- -------- --------
Income (Loss)
from Opera-
tions.......... 2,917 3,217 1,484 3,476 3,563 20,752 1,570 (4,768) 8,465 8,658
Interest Income
(Expense), Net. 152 127 76 68 89 154 (17) (259) 39 181
Other Income,
Net............ 114 33 140 246 256 297 23 3 240 508
------- ------- ------- ------- ------- -------- ------- ------- -------- --------
Income (Loss)
Before Income
Tax Provision.. 3,183 3,377 1,700 3,790 3,908 21,203 1,576 (5,024) 8,744 9,347
Income Tax Pro-
vision......... 1,332 1,300 911 1,651 1,572 9,237 634 800 3,876 4,117
------- ------- ------- ------- ------- -------- ------- ------- -------- --------
Net Income
(Loss)......... $ 1,851 $ 2,077 $ 789 $ 2,139 $ 2,336 $ 11,966 $ 942 $(5,824) $ 4,868 $ 5,230
======= ======= ======= ======= ======= ======== ======= ======= ======== ========
Net Income
(Loss) Per
Share.......... $ .59 $ .24 $ .26
======== ======== ========
Weighted Average
Shares
Outstanding(9). 20,163 20,163 20,163
======== ======== ========
OTHER DATA:
EBITDA(10) $ 3,074 $ 3,417 $ 1,853 $ 3,960 $ 4,027 $26,061 $ 1,665 $(4,570) $ 11,132 $ 11,843
======= ======= ======= ======= ======= ======== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29, JUNE 30, 1997
--------------------------------------- -------------------------------------
PRO PRO FORMA
1993 1994 1995 1996 1997 ACTUAL(3) FORMA(2) AS ADJUSTED(2)
------- ------- ------- ------- ------- --------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equiva-
lents.................. $ 700 $ 186 $ 650 $ 1,774 $ 4,339 $ 5,875 $ 10,214 $ 9,457
Working Capital......... 3,633 3,473 4,561 3,285 6,337 7,425 (13,359) 29,303
Total Assets............ 12,438 15,221 23,528 28,282 27,153 64,942 174,284 173,330
Total Debt.............. -- -- -- -- 1,290 31,045 46,022 2,107
Preferred Stock......... -- -- -- -- -- 17,121 19,271 --
Shareholders' Equity.... 3,257 2,175 5,955 6,373 5,990 (10,998) 25,468 118,618
</TABLE>
- -------
(1) Concurrent with the Offering, the Company intends to change its fiscal
year end from February 28 to December 31.
(2) Pro forma financial data give effect to the completed and pending
acquisitions that are described in Unaudited Pro Forma Combined Financial
Statements, as if they had all occurred at the beginning of each period
presented. Such results are not necessarily indicative of the results the
Company would have obtained had these events actually occurred on January
1, 1996 for the Income Statement Data or on June 30, 1997 for the Balance
Sheet Data. Pro forma as adjusted financial data give effect to a
reduction in interest expense as a result of reductions in indebtedness
upon application of a portion of the net proceeds to the Company from the
Offering and the redemption of preferred stock.
(3) The Company's acquisitions of the Pre-Offering Companies and Group
Maintenance America Corp. have been accounted for as purchases and,
accordingly, the operations of these acquired businesses are included in
the financial data from the effective date of their respective
acquisition.
(4) Includes non-recurring, non-cash compensation expense of $7.0 million
related to the reverse acquisition of GroupMAC Parent during the four
months ended June 30, 1997, which is excluded in the Pro Forma As Adjusted
six months ended June 30, 1997. Reflects a decrease of $11.1 million, $4.2
million and $5.2 million for the Pro Forma As Adjusted year ended December
31, 1996, and the Pro Forma As Adjusted six months ended June 30, 1996 and
1997, respectively, for pro forma reductions in salaries, bonuses and
benefits to former owners of the GroupMAC Companies to which they have
agreed prospectively.
(5) Includes $2.4 million for compensation expense resulting from revaluation
of warrants.
(6) Includes $0.5 million of expenses for the formation and build-up of
corporate management and infrastructure.
(7) Includes $1.6 million of expenses for the formation and build-up of
corporate management and infrastructure.
(8) Consists of amortization recorded or to be recorded, as a result of the
acquisition of GroupMAC Companies, over a 40-year period and computed on
the basis described in the Notes to the Unaudited Pro Forma Combined
Financial Statements.
(9) Computed on a basis described in Note 4 of Notes to Unaudited Pro Forma
Combined Financial Statements.
(10) Represents earnings before interest, taxes, depreciation and amortization
("EBITDA"). Based on its experience in the industry, the Company believes
that EBITDA is an important tool for measuring the performance of
companies in the industry (including potential acquisition targets) in
several areas such as liquidity, operating performance and leverage. In
addition, lenders use EBITDA as a criterion in evaluating companies in
the industry and the Company's financing arrangement contains covenants
in which EBITDA is used as a measure of financial performance. The EBITDA
measure for the Company may not be consistent with similarly titled
measures for other companies. EBITDA should not be considered as an
alternative to operating or net income (as determined in accordance with
GAAP) as an indicator of the Company's performance or to cash flow from
operations (as determined in accordance with GAAP) as a measure of
liquidity. See the comparative historical statements of cash flows
included herein and "Management's Discussion of Financial Condition and
Results of Operations" and "--Liquidity and Capital Resources" for
discussion of other measures of performance determined in accordance with
GAAP and the Company's sources and applications of cash flow.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements and related notes of the Company, all financial
statements of the GroupMAC Companies presented herein and Selected Historical
and Pro Forma Financial Data included elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are derived from providing new installation services
and maintenance, repair and replacement services for HVAC, plumbing,
electrical and other systems to residential and commercial customers.
Approximately 54% of the company's pro forma combined 1996 revenues of $307.5
million were derived from new installation services and 46% were attributable
to maintenance, repair and replacement services. Maintenance, repair and
replacement revenues are recognized as the services are performed, except for
service contract revenue which is recognized ratably over the life of the
contract. Revenues from fixed price installation and retro-fit contracts are
generally accounted for on a percentage-of-completion basis, using the cost-
to-cost method.
Cost of services consists primarily of components, parts and supplies
related to the Company's new installation and maintenance, repair and
replacement services, salaries and benefits of service and installation
technicians, subcontracted services, depreciation, fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees. Certain owners and certain key employees
of the GroupMAC Companies have agreed to reductions totaling $11.1 million in
fiscal 1996 in their compensation and related benefits in connection with
their acquisition by the Company, which have been reflected as a pro forma
adjustment in the Unaudited Pro Forma Combined Statement of Operations. Such
reductions in salaries, bonuses and benefits are in accordance with the terms
of employment agreements.
The Company's diversified business mix is reflected to varying degrees in
its gross margins. The Company's businesses performing primarily maintenance,
repair and replacement services in the residential markets tend to have higher
gross margins, averaging 37.4% for fiscal 1996. The combined gross margin for
GroupMAC Companies providing primarily maintenance, repair and replacement
services in the commercial markets during fiscal 1996 was 27.2%. On the
average, GroupMAC Companies primarily engaged in residential new installation
services have lower gross margins. Such companies' combined gross margin for
fiscal 1996 was 21.2%. The company primarily providing HVAC services in the
residential new installation market had a gross margin of 28.5%, which was
somewhat offset by the companies providing primarily plumbing service to this
market at gross margins ranging from 10.0% to 14.7%. Future consolidated gross
margins may vary depending on, among other things, shifts in the business mix
within the GroupMAC Companies as well as the impact of future acquisitions on
the business mix.
The Company believes that it will, and in certain cases has already begun
to, realize savings from (i) greater volume discounts from suppliers of
components, parts and supplies; (ii) consolidation of insurance and bonding
programs; (iii) other general and administrative expenses such as training and
advertising; and (iv) the Company's ability to borrow at lower interest rates
than most, if not all, of the GroupMAC Companies. Offsetting these savings
will be costs related to the Company's new corporate management, costs
associated with being a public company and integration costs.
The Company recorded a non-recurring, non-cash compensation charge of
$206,000 during the fourth quarter of 1996 relating to certain shares of
Common Stock sold to management, representing the difference between the
amount paid for the shares and the estimated fair value of the shares on the
date of sale. This non-recurring compensation charge is not included in the
Pro Forma Combined Financial Statements.
23
<PAGE>
As a result of the acquisition of the GroupMAC Companies, $75.7 million,
representing the excess of the fair value of the consideration paid over the
fair value of the net assets to be acquired, will be recorded as goodwill on
the Company's balance sheet. Goodwill will be amortized as a non-cash charge
to the income statement over a 40-year period. The pro forma impact of this
amortization expense, which is substantially non-deductible for tax purposes,
is $1.9 million per year on an after-tax basis.
COMBINED RESULTS OF OPERATIONS
The combined results of operations of the GroupMAC Companies for the periods
presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the revenues, cost of services and selling, general and
administrative expenses of the individual GroupMAC Companies on an historical
basis. The combined results of operations assume that each of the GroupMAC
Companies was combined from the beginning of each period presented. The
combined results also exclude the effect of pro forma adjustments and may not
be comparable to, and may not be indicative of, the Company's post-combination
results of operations because (i) the GroupMAC Companies were not under common
control or management during the periods presented; (ii) the Company will
incur incremental costs for its corporate management and the costs of being a
public company; (iii) the Company will use the purchase method to record the
acquisitions of the GroupMAC Companies at different points in time, resulting
in the recording of goodwill that will be amortized over 40 years; and (iv)
the combined data does not reflect the potential benefits and cost savings the
Company expects to realize when operating as a combined entity.
The following table sets forth certain unaudited combined financial data for
the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
---------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $235,234 100.0% $258,834 100.0% $307,507 100.0% $151,396 100.0% $157,941 100.0%
Cost of Services........ 178,748 76.0 196,847 76.1 235,911 76.7 117,917 77.9 121,359 76.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross Profit............ 56,486 24.0 61,987 23.9 71,596 23.3 33,479 22.1 36,582 23.2
Selling, General and Ad-
ministrative Expenses.. 49,410 21.0 53,143 20.5 60,162 19.6 28,319 18.7 39,273 24.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Income (Loss) from Oper-
ations................. 7,076 3.0 8,844 3.4 11,434 3.7 5,160 3.4 (2,691) (1.7)
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the Offering.
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues increased $6.5 million, or 4.3%, from $151.4 million for
the six months ended June 30, 1996 to $157.9 million for the six months ended
June 30, 1997. The increase in revenues was primarily volume driven and was
attributable to continuing strength in the Seattle, Washington and Portland,
Oregon commercial markets with respect to MacDonald-Miller Industries, Inc.
("MacDonald-Miller"), increased market penetration in certain Ohio markets by
Airtron, incremental business from existing customers at Masters and
incremental service agreements secured by Linford. Of the 24 GroupMAC
Companies, 18 reported an increase in revenues from the six month period ended
June 30, 1996 to the corresponding period in 1997.
Gross Profit. Gross profit increased $3.1 million, or 9.3%, from $33.5
million for the six months ended June 30, 1996 to $36.6 million for the six
months ended June 30, 1997. Gross margin increased from 22.1% to 23.2% from
the six month period ended June 30, 1996 to the corresponding period in 1997.
The increase in gross profit was primarily attributable to the overall revenue
increase coupled with lower material costs at Airtron, an increase in higher
margin special project and tenant improvement work at MacDonald-Miller and an
increase in higher margin replacement sales at Willis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11.0 million, or 38.9%, from $28.3 million
for the six months ended June 30, 1996 to $39.3 million for the six months
ended June 30, 1997. The increase was primarily attributable to (i) a non-
recurring, non-cash compensation expense of $7.0 million related to the
reverse acquisition of GroupMAC parent, (ii) $844,000 of
24
<PAGE>
additional compensation paid to owners of the individual companies and (iii)
$2.4 million related to the formation and build-up of the corporate management
infrastructure necessary to build the Company through acquisitions and manage
the consolidated GroupMAC Companies. As a percentage of revenues, selling,
general and administrative expenses increased from 18.7% to 24.9% from the six
month period ended June 30, 1996 compared to the corresponding period in 1997.
Unaudited Fiscal Year 1996 Compared to Unaudited Fiscal Year 1995
Revenues. Revenues increased $48.7 million, or 18.8%, from $258.8 million in
fiscal 1995 to $307.5 million for fiscal 1996. The increase in revenues was
primarily volume driven and was attributable to an increase in all sectors of
MacDonald-Miller's business, particularly contracted "design and build"
projects, retrofits, remodeling and technical services; increased residential
HVAC new installation revenue at Airtron; and increased residential HVAC and
plumbing installation revenues at Masters. Additionally, other companies
providing primarily commercial services increased revenues by $8.0 million, or
20.8%, for the period and companies providing primarily residential services
increased revenues by $5.8 million or 13.4% for the period. Of the 24 GroupMAC
Companies, 22 reported an increase in revenues from fiscal 1995 to 1996, most
of which were due to increases in volume.
Gross Profit. Gross profit increased $9.6 million, or 15.5%, from $62.0
million in fiscal 1995 to $71.6 million in fiscal 1996. Gross margin declined
slightly from 23.9% to 23.3% from fiscal 1995 to fiscal 1996. Approximately
54% of the increase in gross profit was attributable to increased sales volume
at Airtron, Masters and K&N at consistent or slightly higher gross margins
between the periods coupled with an increase in sales volume at MacDonald-
Miller, although at lower gross margins. The decline in gross margin at
MacDonald-Miller largely resulted from a higher mix of larger contracts that
typically have lower margins. The remaining residential and commercial service
companies contributed 28% and 19%, respectively, to the increase in gross
profit which resulted from both volume increases and, in the residential
services group, margin increases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.1 million, or 13.4%, from $53.1 million
in fiscal 1995 to $60.2 million in fiscal 1996. Approximately $2.7 million of
the increase was due to additional compensation paid to owners of the
individual businesses, $724,000 was due to the formation and building of the
corporate management infrastructure and the remainder was due to an overall
build-up of administrative infrastructure to manage and control the
significant growth at various companies. As a percentage of revenues, selling,
general and administrative expenses decreased from 20.5% to 19.6% from fiscal
1995 to fiscal 1996.
Unaudited Fiscal Year 1995 Compared to Unaudited Fiscal Year 1994
Revenues. Revenues increased $23.6 million, or 10.0%, from $235.2 million in
fiscal 1994 to $258.8 million in fiscal 1995. The increase in revenues was
primarily attributable to higher volumes in each sector of MacDonald-Miller's
business, particularly in "design and build" projects, retrofits and
remodeling; increased market penetration and additional revenues from existing
customers at Masters; incremental revenues from the purchase of A-1 by A-ABC
during fiscal 1994; a higher volume of "design and build" work at Yale;
increased market share captured at Airtron and the start-up of two new offices
in Austin, Texas and Las Vegas, Nevada by K&N.
Gross Profit. Gross profit increased $5.5 million, or 9.7%, from $56.5
million in fiscal 1994 to $62.0 million in fiscal 1995. The increase in gross
profit was primarily attributable to the higher sales volumes at MacDonald-
Miller, Masters, A-ABC/A-1, Yale, Airtron and K&N. Gross margin remained
fairly consistent at 24.0% in fiscal 1994 and 23.9% in fiscal 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.7 million, or 7.5%, from $49.4 million in
fiscal 1994 to $53.1 million in fiscal 1995. The increase in selling, general
and administrative expense was largely due to a $2.2 million increase in
compensation paid to owners of the individual businesses. As a percentage of
revenues, selling, general and administrative expenses decreased from 21.0% to
20.5%.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the operations and growth of the GroupMAC Companies have been
financed through internally generated working capital and borrowings from
commercial banks or other lenders. These borrowings are generally secured by
substantially all of the assets of the respective GroupMAC Companies, as well
as personal guarantees of the respective owners. With respect to the Pre-
Offering Companies, a substantial portion of their existing indebtedness was
repaid and refinanced through the Company's borrowing facility immediately
following the closing of each of the transactions. The Company believes that
$12.4 million of the net proceeds of the Offering will be used to repay debt
assumed and certain obligations resulting from the acquisition of the GroupMAC
Companies.
In May 1997, the Company entered into a $35 million credit agreement (as
modified to date, the "Original Credit Agreement") with a group of banks
providing for secured facilities consisting of an 18 month revolving credit
line of $3 million, a six-year term loan of $20 million used in connection
with the acquisition of Airtron, and a $12 million term loan facility, having
a final maturity six years after the date of the Original Credit Agreement,
which was used to acquire the Pre-Offering Companies. All of the Company's
loan obligations bear interest at the prime rate. The Original Credit
Agreement contains covenants which, among other matters, restrict or limit the
ability of the Company to pay dividends, incur indebtedness, make capital
expenditures and repurchase capital stock. The Company must also maintain (i)
a minimum level of net worth (deficit) of ($10,111,467) plus 100% of any
increase in net worth resulting from the issuance of any capital stock plus
75% of the consolidated after tax income (adjusted semi-annually), (ii) a
ratio of indebtedness to earnings before interest, taxes, depreciation and
amortization not greater than 3.0 to 1.0, (iii) a ratio of indebtedness to net
worth of 3.25 to 1.0 (decreasing to 2.60 in 1998 and 1.50 in 1999) and (iv) a
fixed charge coverage ratio of at least 1.25 to 1.0. As of the date hereof,
the Company is in compliance with these requirements. As of September 30,
1997, available borrowing capacity under the Original Credit Agreement was
$3.0 million.
The Company has received a commitment from Texas Commerce Bank National
Association to provide a new credit facility with an initial borrowing
capacity of up to $75 million upon completion of the Offering and is currently
negotiating the definitive documentation for such facility. There is no
assurance, however, that such facility will be in place prior to the closing
of the Offering. Under the Bank Credit Agreement, the Company must maintain
(i) a minimum level of net worth equal to the net worth at the closing date of
the Bank Credit Agreement less $750,000 plus 100% of the net proceeds of any
equity issued plus 75% of cumulative net income after the closing date, (ii) a
ratio of indebtedness to earnings before interest, taxes, depreciation and
amortization of less than 2.5 to 1.0, (iii) a ratio of indebtedness to
capitalization of not greater than 55%, (iv) a fixed charge coverage ratio of
at least 1.20 to 1.0 and (v) a positive tangible net worth. If such financial
covenants were in place on the date hereof and assuming the Offering and the
Acquisitions had been completed, the Company would be in compliance with those
covenants. For additional information about the proposed terms of this credit
facility, see "Description of Bank Credit Agreement." Management expects to
repay all amounts outstanding under the Original Credit Agreement with net
proceeds of the Offering. The Company may also utilize proceeds of the
Offering to pay additional amounts, if any, due to the former owners of the
Offering Acquisition Companies under working capital adjustments to the
purchase prices. See "Use of Proceeds."
Prior to the closing of the Offering, certain of the Offering Acquisition
Companies that are S corporations may distribute cash and certain non-
operating assets to their shareholders in an amount not to exceed the balances
of their respective accumulated adjustment accounts. In addition, several
former owners of the GroupMAC Companies have the ability to receive additional
amounts of purchase price, payable in cash and Common Stock in 1998,
contingent upon the occurrence of future events. The Company's best estimate
of this amount is approximately $5 million, payable in a combination of cash
and shares of Common Stock.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing vehicles, inventory and supplies used in
the operation of the business. During fiscal 1996 and the six months ended
June 30, 1997, capital expenditures aggregated $4.0 million and $2.4 million,
respectively.
26
<PAGE>
The Company anticipates that its cash flow from operations will provide cash
in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment.
The Company intends to pursue aggressively acquisition opportunities and to
fund future acquisitions through a combination of operating cash flow,
borrowings under the Bank Credit Agreement and the issuance of Common Stock.
SEASONAL AND CYCLICAL NATURE OF BUSINESS
The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installations is generally lower during the winter months due
to reduced construction activities during inclement weather and less use of
air conditioning during the colder months. Demand for HVAC services is
generally higher in the second and third quarters. Accordingly, the Company
expects its revenues and operating results generally will be lower in the
first and fourth quarters. Historically, the construction industry has been
highly cyclical. As a result, the Company's volume of business may be
adversely affected by declines in new installation projects in various
geographic regions of the United States. See "Risk Factors--Exposure to
Downturns in Housing Starts or New Commercial Construction" and "--Fluctuation
in Quarterly Operating Results."
INFLATION
Inflation did not have a significant effect on the results of operations of
the GroupMAC Companies for 1994, 1995, 1996 or the six months ended June 30,
1997.
GROUPMAC AND SUBSIDIARIES (FORMERLY AIRTRON)
Airtron was founded in 1970 and custom designs, installs, maintains and
repairs HVAC systems in new and existing homes and businesses from 14
locations in six states. Airtron's revenues for fiscal 1996 were $81.9 million
and income from operations was $3.6 million. Airtron derived 81% of its 1996
revenues from new installation services and 19% from maintenance, repair and
replacement services. Airtron is headquartered in Dayton, Ohio and has its
facilities in New Port Richey and Clearwater, Florida, Indianapolis, Indiana,
Wichita, Kansas, Louisville and Erlanger, Kentucky, Cincinnati, Cleveland,
Columbus and Dayton, Ohio, and Austin, Dallas, Houston and San Antonio, Texas.
Airtron acquired GroupMAC in May 1997 and acquired A-ABC/A-1, Charlie's,
Costner, Hallmark, Jarrell and K&N and the assets of Way Residential in June
1997.
RESULTS OF OPERATIONS--GROUPMAC AND SUBSIDIARIES (FORMERLY AIRTRON)
The following table sets forth certain financial data for the periods
indicated. For comparative purposes, for the six month period ended June 30,
1997, the "Historical Airtron" column excludes the effects of the acquisitions
in May and June 1997. The "GroupMAC and Subsidiaries" column reflects the
consolidated operations of Airtron and such companies from their respective
dates of acquisition (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29, SIX MONTHS ENDED JUNE 30,
------------------------------------------- --------------------------------------------
HISTORICAL GROUPMAC AND
AIRTRON SUBSIDIARIES
------------- --------------
1995 1996 1997 1996 1997 1997
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $72,226 100.0% $73,765 100.0% $81,880 100.0% $37,127 100.0% $38,676 100.0% $42,844 100.0%
Cost of Services........ 50,460 69.9 52,674 71.4 58,506 71.5 26,918 72.5 27,813 71.9 30,920 72.2
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 21,766 30.1 21,091 28.6 23,374 28.5 10,209 27.5 10,863 28.1 11,924 27.8
Selling, General and
Administrative
Expenses............... 20,282 28.0 17,615 23.9 19,811 24.1 9,470 25.5 9,824 25.4 18,056 42.1
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,484 2.1 3,476 4.7 3,563 4.4 739 2.0 1,039 2.7 (6,132) (14.3)
</TABLE>
27
<PAGE>
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues for Historical Airtron increased $1.6 million, or 4.3%,
from $37.1 million for the six months ended June 30, 1996 to $38.7 million for
the six months ended June 30, 1997. Revenues for GroupMAC and Subsidiaries
increased $5.7 million, or 15.4%, from $37.1 million for the six months ended
June 30, 1996 to $42.8 million for the six months ended June 30, 1997. The
increase in revenues with respect to historical Airtron comparisons was
attributable to Airtron's market penetration in the Columbus, Ohio and Dayton,
Ohio markets, resulting in a larger volume of new home starts. The increase in
revenues for GroupMAC and Subsidiaries resulted from the above-mentioned
growth in Historical Airtron and the inclusion of $4.1 million in revenues
from the acquisitions completed during the period.
Gross Profit. Gross profit for Historical Airtron increased $654,000, or
6.4%, from $10.2 million for the six months ended June 30, 1996 to $10.9
million for the six months ended June 30, 1997. Gross margin increased
slightly from 27.5% to 28.1% for the six-month periods ending June 30, 1996
and 1997, respectively. The gross margin increase with respect to Historical
Airtron was primarily due to a reduction in material costs, partially offset
by increased labor costs. Gross profit for GroupMAC and Subsidiaries increased
$1.7 million, or 16.7%, from $10.2 million to $11.9 million. As a percentage
of revenues, gross margin increased from 27.5% to 27.8%. The margin increase
resulted from increased gross margin at Historical Airtron partially offset by
somewhat lower gross margin from K&N.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Historical Airtron increased $354,000, or 3.7%,
from $9.5 million for the six months ended June 30, 1996 to $9.8 million for
the six months ended June 30, 1997. The overall increase in selling, general
and administrative expenses was primarily due to an increase in compensation,
professional fees and office rent partially offset by a decline in selling
expenses. As a percentage of revenues, selling, general and administrative
expenses remained relatively constant at 25.5% and 25.4% for the six month
periods ending June 30, 1996 and 1997, respectively. Selling, general and
administrative expenses for GroupMAC and Subsidiaries increased $8.6 million,
or 90.5%, from $9.5 million for the six months ended June 30, 1996 to $18.1
million for the six months ended June 30, 1997. This increase resulted from
(i) a non-recurring, non-cash compensation expense of $7.0 million related to
the reverse acquisition of GroupMAC Parent and (ii) increased expenses for
Historical Airtron and the inclusion of $1.3 million of selling, general and
administrative expenses related to the companies acquired during the period.
As a percentage of revenues, selling, general and administrative expenses
increased from 25.5% to 42.1% for the six months ended June 30, 1996 and 1997,
respectively, as a result of the inclusion of two months of the corporate
overhead expenses of GroupMAC Parent, higher selling, general and
administrative expenses as a percentage of revenues for the companies acquired
during the period and the non-recurring, non-cash compensation expense
discussed above.
Year Ended February 28, 1997 Compared to Year Ended February 29, 1996
Revenues. Revenues increased $8.1 million, or 11.0%, from $73.8 million for
the year ended February 29, 1996 to $81.9 million for the year ended February
28, 1997. The increase in revenues was attributable to increased market
penetration in new residential construction in the Indianapolis, Indiana and
Dallas, Texas markets, resulting in a larger volume of new home starts.
Gross Profit. Gross profit increased $2.3 million, or 10.9%, from $21.1
million for the year ended February 29, 1996 to $23.4 million for the year
ended February 28, 1997. Gross margin remained relatively constant at 28.6%
and 28.5% for the years ending February 29, 1996 and February 28, 1997,
respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.2 million, or 12.5%, from $17.6 million
for the year ended February 29, 1996 to $19.8 million for the year ended
February 28, 1997. Such increase was primarily attributable to an increase in
compensation, vehicle leases and professional fees of the Company. As a
percentage of revenues, selling, general and administrative expenses remained
relatively constant at 23.9% and 24.1% for the years ending February 29, 1996
and February 28, 1997, respectively.
28
<PAGE>
Year Ended February 29, 1996 Compared to Year Ended February 28, 1995
Revenues. Revenues increased $1.6 million, or 2.2%, from $72.2 million for
the year ended February 28, 1995 to $73.8 million for the year ended February
29, 1996. The increase in revenues was attributable to increased sales volume
from new residential construction through the capture of additional market
share in the Indianapolis, Indiana and Dallas, Texas markets.
Gross Profit. Gross profit decreased $675,000, or 3.1%, from $21.8 million
for the year ended February 28, 1995 to $21.1 million for the year ended
February 29, 1996. Gross margin declined from 30.1% to 28.6%. The decrease in
gross profits was primarily attributable to higher material costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $2.7 million, or 13.3%, from $20.3 million
for the year ended February 28, 1995 to $17.6 million for the year ended
February 29, 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 28.0% to 23.9% due to a significantly
higher non-cash compensation charge in fiscal 1995 to accrue for the change in
market value of stock appreciation rights and warrants.
LIQUIDITY AND CAPITAL RESOURCES--GROUPMAC AND SUBSIDIARIES (FORMERLY AIRTRON)
From March 1, 1994 through the six months ended June 30, 1997, Historical
Airtron generated a net $9.7 million from operating activities. Net income,
depreciation, deferred taxes and non-cash compensation generated $12.4 million
and changes in asset and liability accounts utilized a net $2.7 million,
principally due to a $3.3 million increase in accounts receivable partially
offset by increases in accounts payable and accrued expenses.
Cash used in investment activities by Historical Airtron from March 1, 1994
through the six months ended June 30, 1997, was primarily attributable to
purchases of property and equipment of $1.0 million and was partially offset
by proceeds from sales of property and equipment. Cash used in financing
activities by Historical Airtron was primarily attributable to purchases of
stock and warrants from selling shareholders totaling $5.5 million.
Historical Airtron had working capital of $7.1 million as of June 30, 1997
and no long-term debt outstanding. GroupMAC and Subsidiaries had working
capital of $7.4 million as of June 30, 1997 and had outstanding long-term debt
of $26.5 million, which primarily resulted from the financing of the
acquisitions of GroupMAC Parent, A-ABC/A-1, Hallmark, K&N, Costner, Charlie's,
Jarrell and Way. See "Combined Results of Operations--Liquidity and Capital
Resources."
MACDONALD-MILLER
MacDonald-Miller was founded in 1965 and provides a full range of HVAC
services to commercial and industrial customers in the Northwestern United
States including design and engineering; fabrication and installation of sheet
metal, piping, plumbing and controls; and HVAC service and maintenance.
MacDonald-Miller's revenues for fiscal 1996 were $66.1 million and income from
operations was $2.1 million. MacDonald-Miller derived 59% of its 1996 revenues
from maintenance, repair and replacement services and 41% from new
installation services. MacDonald-Miller is headquartered in Seattle,
Washington and has facilities in Seattle and Portland, Oregon.
29
<PAGE>
RESULTS OF OPERATIONS--MACDONALD-MILLER
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $39,534 100.0% $45,508 100.0% $66,059 100.0% $36,382 100.0% $38,836 100.0%
Cost of Services........ 32,256 81.6 36,927 81.1 56,373 85.3 31,590 86.8 33,451 86.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 7,278 18.4 8,581 18.9 9,686 14.7 4,792 13.2 5,385 13.9
Selling, General and Ad-
ministrative
Expenses............... 6,088 15.4 7,338 16.2 7,632 11.6 3,706 10.2 3,788 9.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,190 3.0 1,243 2.7 2,054 3.1 1,086 3.0 1,597 4.1
</TABLE>
Six Months Ended June 30, 1997 Compared to Unaudited Six Months Ended June
30, 1996
Revenues. Revenues increased $2.4 million, or 6.6%, from $36.4 million for
the six months ended June 30, 1996 to $38.8 million for the six months ended
June 30, 1997. The increase in revenues was attributable to continuing
strength in the company's Northwest commercial markets, principally Seattle,
Washington and Portland, Oregon, including a $20 million contract with a large
software company to be completed in 1997, a 32% increase in revenues from the
company's Special Projects and Tenant Improvement operations, and a 9%
increase in revenues from the company's Commercial Service operations.
Gross Profit. Gross Profit increased $593,000, or 12.4%, from $4.8 million
for the six months ended June 30, 1996 to $5.4 million for the six months
ended June 30, 1997. Gross margin increased from 13.2% for the first six
months of 1996 to 13.9% for the same period of 1997. The gross profit increase
was attributable principally to higher volume and realized gross margins in
the MacDonald-Miller's Special Projects and Tenant Improvement operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $82,000, or 2.2%, from $3.7 million for the
six months ended June 30, 1996 to $3.8 million for the six months ended June
30, 1997. Both the dollar and percentage of revenue changes were attributable
to the higher revenue levels in 1997 compared to 1996. As a percentage of
revenues, selling, general and administrative expenses decreased slightly from
10.2% for the six months of 1996 to 9.8% for the same period of 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $20.6 million, or 45.3%, from $45.5 million for
the year ended December 31, 1995 to $66.1 million for the year ended December
31, 1996. The increase in revenues was attributable to a 15%, or $1.6 million,
increase in revenues from Service and Maintenance operations, and a 23%, or
$2.0 million, increase in revenues from the company's Special Projects and
Tenant Improvement operations. The $17 million balance of the increase was
attributable to contracted design and build projects, HVAC system retrofits
and remodels, lighting energy retrofits and technical services, together
representing a revenue increase of 65.4% over 1995. This increase was
primarily volume driven and directly related to the company's effort to
increase its market presence in the Seattle, Washington and Portland, Oregon
metropolitan areas, fueled by continued strength of commercial activity in the
Northwest.
Gross Profit. Gross profit increased $1.1 million, or 12.8%, from $8.6
million for the year ended December 31, 1995 to $9.7 million for the year
ended December 31, 1996. Gross margin decreased from 18.9% to 14.7% due to the
acceptance of certain lower margin projects and increased direct costs related
to the rapid revenue growth experienced in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $294,000, or 4.0%, from $7.3 million for the
year ended December 31, 1995 to $7.6 million for the year ended December 31,
1996. The increase in these expenses was directly attributable to incremental
costs incurred to
30
<PAGE>
implement a job cost and accounting software conversion and other management
information systems processes and infrastructure. As a percentage of revenues,
selling, general and administrative expenses decreased from 16.2% to 11.6% due
to the increased revenue levels.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased $6.0 million, or 15.2%, from $39.5 million for
the year ended December 31, 1994 to $45.5 million for the year ended December
31, 1995. The increase in revenues was attributable to a $1.2 million, or
10.5%, increase in revenues from Service and Maintenance operations, a $1.9
million, or 27.8%, increase in revenues from the company's Special Projects
and Tenant Improvement operations, and a $2.9 million, or 12.6%, increase in
revenues from installation operations, including design and build projects,
retrofits and remodeling. The broad-based increase in revenues was primarily
volume driven and attributable to generally increasing activity in the Seattle
area, the Company's principal market, and continued efforts to increase the
underlying base of service and maintenance business.
Gross Profit. Gross profit increased $1.3 million, or 17.8%, from $7.3
million for the year ended December 31, 1994 to $8.6 million for the year
ended December 31, 1995. Gross margin increased from 18.4% to 18.9% for the
years ending December 31, 1994 and 1995, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 19.7%, from $6.1 million
for the year ended December 31, 1994 to $7.3 million for the year ended
December 31, 1995. The increase was attributable generally to the higher level
of revenues and an approximate $200,000 increase relating to the initial
stages of the aforementioned job cost and accounting software conversion and
other management information system processes and infrastructure that
continued into 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 15.4% to 16.2% for the years ending
1994 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES--MACDONALD-MILLER
From January 1, 1994 through the six months ended June 30, 1997, MacDonald-
Miller utilized a net $315,000 from operating activities. Net income and
depreciation generated $4.1 million and changes in asset and liability
accounts utilized a net $4.4 million, principally due to a $7.7 million
increase in accounts receivable partially offset by corresponding increases in
accounts payable and accrued expenses.
Net cash used in investment activities of $2.6 million was primarily
attributable to equipment and to real estate held for investment.
Net cash provided by financing activities of $2.9 million was primarily
attributable to the issuance and redemptions of common stock, long-term bank
financing related to capital expenditures and real estate held for investment
and short-term bank financing utilized to increase working capital.
As of June 30, 1997, MacDonald-Miller had working capital of $3.0 million
and $708,000 of long-term debt outstanding.
MASTERS
Masters, Inc. ("Masters") was founded in 1986 and provides HVAC and plumbing
services in the Washington, D.C. area. Masters' revenues for fiscal 1996 were
$39.8 million and income from operations for fiscal 1996 was $1.5 million.
Masters derived 100% of its 1996 revenues from new installation services.
Masters is headquartered in Gaithersburg, Maryland and has its facilities in
Gaithersburg and Chantilly, Virginia.
31
<PAGE>
RESULTS OF OPERATIONS--MASTERS
The following table sets forth certain financial data for the periods
indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $30,327 100.0% $35,160 100.0% $39,826 100.0% $18,279 100.0% $19,318 100.0%
Cost of Services........ 28,018 92.4 31,746 90.3 35,854 90.0 16,639 91.0 17,457 90.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,309 7.6 3,414 9.7 3,972 10.0 1,640 9.0 1,861 9.6
Selling, General and Ad-
ministrative
Expenses............... 1,664 5.5 2,373 6.7 2,484 6.3 1,009 5.5 1,197 6.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 645 2.1 1,041 3.0 1,488 3.7 631 3.5 664 3.4
</TABLE>
Six Months Ended June 30, 1997 Compared to Unaudited Six Months Ended June
30, 1996
Revenues. Revenues increased $1.0 million, or 5.5%, from $18.3 million for
the six months ended June 30, 1996 to $19.3 million for the six months ended
June 30, 1997. The increase in revenues was primarily attributable to an
additional volume of housing starts generated from existing customers.
Gross Profit. Gross profit increased $221,000, or 13.8%, from $1.6 million
for the six months ended June 30, 1996 to $1.9 million for the six months
ended June 30, 1997. Gross margin increased from 9.0% for the six months ended
June 30, 1996 to 9.6% for the six months ended June 30, 1997. The increase was
primarily attributable to a higher mix of fire sprinkler installations that
typically produce higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $188,000, or 18.8%, from $1.0 million for
the six months ended June 30, 1996 to $1.2 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily due to staff additions to keep pace with the growth of the
company, increased bad debts and an increase in professional fees. As a
percentage of revenues, selling, general and administrative expenses increased
from 5.5% to 6.2% over the respective periods.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased $4.6 million, or 13.1%, from $35.2 million for
the year ended December 31, 1995 to $39.8 million for the year ended December
31, 1996. The increase was attributable to an additional volume of housing
starts generated from existing customers and increased market penetration.
Gross Profit. Gross profit increased $558,000, or 16.4%, from $3.4 million
for the year ended December 31, 1995 to $4.0 million for the year ended
December 31, 1996. Gross margins increased slightly from 9.7% to 10.0% for the
years ending 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $111,000, or 4.6%, from $2.4 million for the
year ended December 31, 1995 to $2.5 million for the year ended December 31,
1996. As a percentage of revenues, selling, general and administrative
expenses decreased from 6.7% to 6.3% over the same period. This decrease was
primarily attributable to the net increase in revenue and the relatively fixed
nature of these expenses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased $4.9 million, or 16.2%, from $30.3 million for
the year ended December 31, 1994 to $35.2 million for the year ended December
31, 1995. The increase was attributable to an additional volume of housing
starts generated from existing customers, increased market penetration and a
greater volume of HVAC new installations resulting from management efforts to
further expand this service line.
32
<PAGE>
Gross Profit. Gross profit increased $1.1 million, or 47.8%, from $2.3
million for the year ended December 31, 1994 to $3.4 million for the year
ended December 31, 1995. Gross margin increased from 7.6% to 9.7% due to a
greater volume of higher margin HVAC new installations coupled with margin
expansion in plumbing new installations from more efficient production.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $709,000, or 41.7%, from $1.7 million for
the year ended December 31, 1994 to $2.4 million for the year ended December
31, 1995. As a percentage of revenues, selling, general and administrative
expenses increased from 5.5% to 6.7% due to an increase in bad debt expense,
an increase in personnel necessary to effectively manage the Company's rapid
growth and the addition of an executive incentive program.
LIQUIDITY AND CAPITAL RESOURCES--MASTERS
From January 1, 1994 through the six months ended June 30, 1997, Masters
generated $4.2 million in cash from operating activities. Net cash used in
investment activities was primarily attributable to capital expenditures of
$1.8 million. Net cash used in financing activities was primarily attributable
to $2.1 million in dividends paid to the shareholder.
Masters had working capital of $4.0 million as of June 30, 1997 and $765,000
of long-term debt outstanding.
K&N
K&N was founded in 1978 and provides plumbing services to the residential
new construction market in the Dallas, Fort Worth and Austin, Texas and Las
Vegas, Nevada markets. K&N also designs, sells, installs and services HVAC
systems in Dallas and Fort Worth. K&N's revenues for fiscal 1996 were $24.3
million and income from operations was $936,000. K&N derived 89% of its 1996
revenues from new installation services and 11% from maintenance, repair and
replacement services. K&N is headquartered in Arlington, Texas and has
facilities in Arlington and Austin, Texas and Las Vegas, Nevada.
RESULTS OF OPERATIONS--K&N
The following table sets forth certain unaudited financial data for the
periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1995 1996 1997 1996 1997(1)
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $21,458 100.0% $22,709 100.0% $24,279 100.0% $11,893 100.0% $12,355 100.0%
Cost of Services........ 18,843 87.8 20,350 89.6 20,705 85.3 10,433 87.7 10,662 86.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 2,615 12.2 2,359 10.4 3,574 14.7 1,460 12.3 1,693 13.7
Selling, General and Ad-
ministrative
Expenses............... 2,275 10.6 2,478 10.9 2,638 10.8 1,349 11.4 1,605 13.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 340 1.6 (119) (0.5) 936 3.9 111 .9 88 .7
</TABLE>
- --------
(1) The operating results of K&N represent six months of activity, even though
K&N was acquired, for accounting purposes, by Airtron on June 1, 1997.
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues increased $462,000, or 3.9%, from $11.9 million for the
six months ended June 30, 1996 to $12.4 million for the six months ended June
30, 1997. The increase in revenues was attributable to a higher volume of new
home construction in the Austin and Las Vegas markets.
33
<PAGE>
Gross Profit. Gross profit increased $233,000, or 15.5%, from $1.5 million
for the six months ended June 30, 1996 to $1.7 million for the six months
ended June 30, 1997. Gross margin increased from 12.3% to 13.7% due to
increases in operational efficiency.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $256,000, or 19.7%, from $1.3 million for
the six months ended June 30, 1996 to $1.6 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to additional owners' compensation expense. As a
percentage of revenues, selling, general and administrative expenses increased
from 11.4% to 13.0% for 1996 and 1997 respectively.
Year Ended March 31, 1997 Compared to Unaudited Year Ended March 31, 1996
Revenues. Revenues increased $1.6 million, or 7.0%, from $22.7 million for
the year ended March 31, 1996 to $24.3 million for the year ended March 31,
1997. The increase in revenues was primarily volume driven and attributable to
the expansion of the Company's customer base to include several new home
builders in the Austin and Las Vegas markets.
Gross Profit. Gross profit increased $1.2 million, or 50.0%, from $2.4
million for the year ended March 31, 1996 to $3.6 million for the year ended
March 31, 1997. The increase was due to a decline in production labor and
material costs for start ups in Austin, Texas and Las Vegas, Nevada, and the
savings from the closing during fiscal 1996 of an unsuccessful operation in
Palmdale, California. Gross margin increased from 10.4% to 14.7% for the years
ending March 31, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $160,000, or 6.4%, from $2.5 million for the
year ended March 31, 1996 to $2.6 million for the year ended March 31, 1997.
As a percentage of revenues, selling, general and administrative expenses
remained relatively constant at 10.9% and 10.8% for the years ending March 31,
1996 and 1997, respectively.
Unaudited Year Ended March 31, 1996 Compared to Unaudited Year Ended March
31, 1995
Revenues. Revenues increased $1.2 million, or 5.6%, from $21.5 million for
the year ended March 31, 1995 to $22.7 million for the year ended March 31,
1996. The increase in revenues was primarily volume driven and attributable to
the new operating facilities in Austin, Texas and Las Vegas, Nevada and a
higher level of new home construction in the Dallas and Fort Worth
metropolitan area.
Gross Profit. Gross profit decreased $256,000, or 9.8%, from $2.6 million
for the year ended March 31, 1995 to $2.4 million for the year ended March 31,
1996. Gross margin decreased from 12.2% to 10.4% for the years ending March
31, 1995 and 1996, respectively. The gross margin decline was primarily
attributable to aggressive pricing and start-up labor costs for the two new
divisions in Austin, Texas and Las Vegas, Nevada.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $203,000, or 8.8% from $2.3 million for the
year ended March 31, 1995 to $2.5 million for the year ended March 31, 1996.
The increase in selling, general and administrative expenses was primarily
attributable to incremental costs relating to the closing of the Palmdale,
California operation and the implementation of a new management information
system. As a percentage of revenues, selling, general and administrative
expenses increased slightly from 10.6% to 10.9%.
LIQUIDITY AND CAPITAL RESOURCES--K&N
From April 1, 1994 through the six months ended June 30, 1997, K&N utilized
$269,000 in cash from operating activities, essentially funding its working
capital needs from operations.
Net cash used in investment activities from April 1994 through June 30, 1997
was attributable to capital expenditures of $2.2 million, primarily relating
to the consolidation of offices in the Dallas-Fort Worth
34
<PAGE>
metropolitan area, the start up of the Austin, Texas and Las Vegas, Nevada
operations and fleet expansion. Financing activities generated a net increase
of $2.4 million from the issuance of long-term debt and net borrowings from
shareholders. The funds were utilized to finance the capital expenditures
noted above and for working capital.
As of June 30, 1997, K&N had working capital of $731,000 and $291,000 of
long-term debt outstanding.
OTHER RESIDENTIAL SERVICE COMPANIES
Pre-Offering Companies
A-ABC and A-1, founded in 1976 and 1994, respectively, provide maintenance,
repair and replacement services for HVAC equipment, as well as home
appliances, to residential customers in the Dallas and Garland, Texas areas.
A-ABC also offers plumbing repair and replacement services. Combined revenues
for fiscal 1996 totaled $8.5 million and combined income from operations
totaled $333,000. A-ABC and A-1 are headquartered in Dallas, Texas.
Callahan Roach and its affiliates provide training and consulting services,
marketing products and pricing programs nationally to over 1,300 independent
service companies, manufacturers and associations. Callahan Roach's revenues
for fiscal 1996 were $1.9 million and income from operations for fiscal 1996
was $8,257. Callahan Roach, founded in 1989, is headquartered in Colorado
Springs, Colorado and has facilities in Atlanta, Georgia, Dublin, Ohio and
Colorado Springs, Colorado.
Costner was founded in 1985 and provides HVAC maintenance, repair and
replacement services to residential customers in the Rock Hill, South Carolina
and Charlotte, North Carolina areas. Costner's revenues for fiscal 1996 were
$3.0 million, and income from operations was $7,487. Costner is headquartered
in Rock Hill, South Carolina.
Hallmark was founded in 1951 and provides HVAC maintenance, repair and
replacement services to residential customers in the Houston and San Antonio,
Texas areas. Hallmark's revenues for fiscal 1996 were $6.5 million, and income
from operations was $8,749. Hallmark is headquartered in Houston, Texas and
has facilities in Houston and San Antonio, Texas.
Jarrell was founded in 1959 and provides plumbing repair services to
residential customers in the Houston, Texas area. Jarrell's revenues for the
fiscal year ended February 28, 1997 were $1.2 million and it had income from
operations of $34,547 during that year. Jarrell is headquartered in Houston,
Texas.
Way Residential was founded in 1977 and provides HVAC services to
residential customers in Houston, Texas. Way Residential's revenues for fiscal
1996 were $659,000 and income from operations was $123,000. Way Residential's
operations have been combined with Hallmark's operations.
Offering Acquisition Companies
Central Carolina Air Conditioning Company ("Central Carolina") was founded
in 1967 and provides HVAC maintenance, repair and replacement services to
residential and commercial customers in the Greensboro and Winston Salem,
North Carolina areas. Central Carolina's revenues for fiscal 1996 were $8.2
million and income from operations was $381,000. In addition, Central Carolina
has deferred $967,000 of service contract revenues due to five-year extended
service contracts. Other GroupMAC Companies typically do not have extended
service contracts in excess of one year. Central Carolina is headquartered in
Greensboro, North Carolina.
Evans Services, Inc. ("Evans") was founded in 1901 and provides plumbing and
HVAC services to residential customers in the Birmingham, Alabama area. Evans'
revenues for fiscal 1996 were $2.3 million and income from operations was
$86,000. Evans is headquartered in Birmingham, Alabama.
35
<PAGE>
Paul E. Smith Co., Inc. ("Paul E. Smith") was founded in 1967 and installs
and maintains, repairs and replaces plumbing systems in new and existing
residences in the Indianapolis, Indiana area. Paul E. Smith's revenues for
fiscal 1996 were $5.6 million and income from operations was $297,000. Paul E.
Smith is headquartered in Indianapolis, Indiana.
Van's Comfortemp Air Conditioning, Inc. ("Van's") was founded in 1965 and
provides HVAC services to residential and light commercial customers in the
Palm Beach-Ft. Lauderdale, Florida area. Van's revenues for fiscal 1996 were
$4.3 million and income from operations was $7,000. Van's is headquartered in
Delray Beach, Florida.
Willis Refrigeration, Air Conditioning & Heating, Inc. ("Willis") was
founded in 1954 and installs, maintains and repairs HVAC systems in new and
existing residences in the greater Cincinnati and northern Kentucky areas.
Willis' revenues for fiscal 1996 were $6.8 million and income from operations
was $542,000 Willis is headquartered in Cincinnati, Ohio.
RESULTS OF OPERATIONS--OTHER RESIDENTIAL SERVICE COMPANIES
The GroupMAC Companies included in the Other Residential Services Companies
derive a majority of their revenues from residential new installation and
maintenance, repair and replacement services. In the aggregate, these 11
companies derived 84% of their revenue in fiscal 1996 from residential
services and 16% from light commercial service. The following table sets forth
certain unaudited financial data for the periods indicated (dollars in
thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997(2)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $38,481 100.0% $43,216 100.0% $48,964 100.0% $23,255 100.0% $24,886 100.0%
Cost of Services........ 25,397 66.0 27,537 63.7 30,628 62.6 14,762 63.5 14,799 59.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 13,084 34.0 15,679 36.3 18,336 37.4 8,493 36.5 10,087 40.5
Selling, General and Ad-
ministrative
Expenses............... 11,432 29.7 14,210 32.9 16,506 33.7 8,082 34.7 8,277 33.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,652 4.3 1,469 3.4 1,830 3.7 411 1.8 1,810 7.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the Offering.
(2) The operating results of the Other Residential Service Companies,
including Hallmark and A-ABC/A-1, represent six months of activity, even
though Hallmark and A-ABC/A-1 were acquired, for accounting purposes, by
Airtron on June 1, 1997.
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues increased $1.6 million, or 6.9%, from $23.3 million for
the six months ended June 30, 1996 to $24.9 million for the six months ended
June 30, 1997. The increase in revenues was primarily volume driven and
attributable to expansion of Central Carolina's commercial service and
replacement business, an increase in replacement sales at Willis and the
occurrence of a significant light commercial job at Jarrell.
Gross Profit. Gross profit increased $1.6 million, or 18.8%, from $8.5
million for the six months ended June 30, 1996 to $10.1 million for the six
months ended June 30, 1997. Gross margin increased from 36.5% to 40.5% from
the six month period ended June 30, 1996 to the corresponding period in 1997.
The increase in gross margin was attributable to higher margins at Central
Carolina from operational efficiencies and from increased higher margin
replacement sales at Willis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $195,000, or 2.4%, from $8.1 million for the
six months ended June 30, 1996 to $8.3 million for the six months
36
<PAGE>
ended June 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 34.7% to 33.2% for the six month period
ended June 30, 1996 compared to the corresponding period in 1997.
Unaudited Fiscal 1996 Compared to Unaudited Fiscal 1995
Revenues. Revenues increased $5.8 million, or 13.4%, from $43.2 million in
fiscal 1995 to $49.0 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to the continued internal expansion
of HVAC services to an appliance company acquired by A-ABC in late 1994, an
acquisition made during early 1996 by Hallmark of an operation in San Antonio
and an aggressive advertising campaign at Costner. Also, revenues increased
significantly at Van's and Willis due to a higher level of replacement sales.
Gross Profit. Gross profit increased $2.6 million, or 16.6%, from $15.7
million in fiscal 1995 to $18.3 million in fiscal 1996. The increase in gross
profit was attributable to the continued internal expansion of HVAC services
at A-1, which was acquired by A-ABC in 1994, an acquisition by Hallmark of a
high margin operation in San Antonio and revenue increases at Costner and
other higher margin companies. Gross margin increased from 36.3% to 37.4% for
fiscal 1995 and 1996, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.3 million, or 16.2%, from $14.2 million
in fiscal 1995 to $16.5 million in fiscal 1996. The increase in selling,
general and administrative expenses was mainly due to the acquisition of an
operation in San Antonio by Hallmark during the period, a higher level of
spending on advertising at Costner and an increase in owner compensation among
all of the residential service companies of $116,000. As a percentage of
revenues, selling, general and administrative expenses increased from 32.9% to
33.7% for fiscal 1995 and 1996, respectively.
Unaudited Fiscal 1995 Compared to Unaudited Fiscal 1994
Revenues. Revenues increased $4.7 million, or 12.2%, from $38.5 million in
fiscal 1994 to $43.2 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to incremental revenues from an
acquisition made by A-ABC in late 1994, the expansion of the customer base at
Central Carolina to include the commercial sector and an increased emphasis on
the selling of service agreements and a higher level of replacement revenues
at Van's.
Gross Profit. Gross profit increased $2.6 million, or 19.8%, from $13.1
million in fiscal 1994 to $15.7 million in fiscal 1995. The increase in gross
profits was primarily attributable to the expanded revenue volumes. Gross
margin increased from 34.0% to 36.3% for fiscal years 1994 and 1995,
respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.8 million, or 24.6%, from $11.4 million
in fiscal 1994 to $14.2 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 29.7% to 32.9% due
to incremental overhead at the company acquired in late 1994 by A-ABC,
incremental owners' compensation of $378,000 across the residential service
companies and an overall increase in infrastructure to keep pace with the
internal growth at each company within the group.
OTHER COMMERCIAL SERVICE COMPANIES
Pre-Offering Companies
Charlie's was founded in 1979 and provides plumbing maintenance, repair and
replacement services to commercial and residential customers in the Houston,
Texas area and specializes in the high-rise condominium market in Houston.
Charlie's revenues for fiscal 1996 were $3.1 million, and income from
operations was $65,000. Charlie's is headquartered in South Houston, Texas.
Sibley Services, Incorporated ("Sibley") was founded in 1974 and provides
HVAC and refrigeration maintenance, repair and replacement services to
commercial and industrial customers in the greater Memphis,
37
<PAGE>
Tennessee area which includes northern Mississippi and northeast Arkansas.
Sibley also offers design and build services, including facility automation.
Sibley's revenues for fiscal 1996 were $7.0 million and income from operations
was $130,018. Sibley is headquartered in Memphis, Tennessee.
USA was founded in 1988 and provides marketing products and training
materials to over 100 member companies across the country. USA's revenues for
fiscal 1996 were $763,000 and income from operations was $33,000. USA is
headquartered in Lakewood, Colorado.
Offering Acquisition Companies
All Service Electric, Inc. ("All Service") was founded in 1990 and provides
electrical contracting services (including new installation and repair
services) primarily to commercial customers in the Jacksonville, Florida area.
All Service's revenues for fiscal 1996 were $2.8 million and income from
operations was $687,000. All Service is headquartered in Jacksonville,
Florida.
Arkansas Mechanical Services, Inc. ("Arkansas Mechanical") was founded in
1988 and provides HVAC maintenance, repair and replacement services to
commercial and industrial customers in the greater Little Rock and
Fayetteville, Arkansas areas. Arkansas Mechanical also provides engineering
services for retrofit upgrades and replacements. Arkansas Mechanical's
revenues were $3.3 million and income from operations was $325,000. Arkansas
Mechanical is headquartered in North Little Rock, Arkansas and has facilities
in the North Little Rock and Fayetteville, Arkansas areas.
Linford Service Company ("Linford") was founded in 1960 and provides HVAC
maintenance, repair and replacement to commercial customers throughout
California. Linford's revenues for fiscal 1996 were $11.3 million and the loss
from operations was $267. Linford is headquartered in Oakland, California and
has facilities in Oakland, Ontario, Sacramento, San Diego and San Jose,
California.
Mechanical Services, Inc. ("Mechanical") was founded in 1993 and provides
design and build, engineering and installation services in the mechanical
trades industry in the Little Rock and Fayetteville, Arkansas areas.
Mechanical Services' revenues for fiscal 1996 were $2.9 million and income
from operations was $56,000. Mechanical Services is headquartered in North
Little Rock, Arkansas and has facilities in North Little Rock and
Fayetteville, Arkansas.
Southeast Mechanical Service, Inc. ("Southeast Mechanical") was founded in
1979 and provides HVAC maintenance, repair and replacement services in the
Miami and Fort Lauderdale, Florida areas. Southeast Mechanical's revenues for
fiscal 1996 were $5.3 million and income from operations was $585,000.
Southeast Mechanical is headquartered in Hollywood, Florida.
Yale Incorporated ("Yale") was founded in 1939 and provides HVAC services to
commercial customers throughout Minnesota. Yale's revenues for fiscal 1996
were $10.1 million and income from operations was $405,000. Yale is
headquartered in Minneapolis, Minnesota.
38
<PAGE>
RESULTS OF OPERATIONS--OTHER COMMERCIAL SERVICE COMPANIES
The GroupMAC Companies included in the Other Commercial Services Companies
derive a majority of their revenues from commercial new installation and
maintenance, repair and replacement services. In the aggregate, these nine
companies derive 96% of their revenue from commercial services and 4% of their
revenues from residential services. The following table sets forth certain
unaudited financial data for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $33,208 100.0% $38,476 100.0% $46,499 100.0% $24,460 100.0% $23,870 100.0%
Cost of Services........ 23,774 71.6 27,613 71.8 33,845 72.8 17,575 71.9 17,177 72.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross Profit............ 9,434 28.4 10,863 28.2 12,654 27.2 6,885 28.1 6,693 28.0
Selling, General and
Administrative
Expenses............... 7,669 23.1 9,129 23.7 10,367 22.3 4,703 19.2 5,198 21.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from Operations.. 1,765 5.3 1,734 4.5 2,287 4.9 2,182 8.9 1,495 6.3
</TABLE>
- --------
(1) Several of the individual GroupMAC Companies have fiscal year ends that
differ from December 31, which is the year end all of the GroupMAC
Companies will use concurrent with the Offering.
Unaudited Six Months Ended June 30, 1997 Compared to Unaudited Six Months
Ended June 30, 1996
Revenues. Revenues declined $590,000, or 2.4%, from $24.5 million for the
six months ended June 30, 1996 to $23.9 million for the six months ended June
30, 1997. The decrease in revenues was primarily volume driven and
attributable to a $2.0 million decline in revenues at Sibley which resulted
from an internal decision to discontinue a large, low margin customer
relationship. Such decline was offset by growth at Linford from incremental
service agreements and at Mechanical Services from incremental "design and
build" project work.
Gross Profit. Gross profit declined $192,000, or 2.9%, from $6.9 million for
the six months ended June 30, 1996 to $6.7 million for the six months ended
June 30, 1997. The decline in gross profit primarily resulted from the
discontinuance of the customer relationship discussed above. Gross margin
remained consistent at 28.1% and 28.0% for the six month periods ended June
30, 1996 and 1997, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $494,000, or 10.6%, from $4.7 million for
the six months ended June 30, 1996 to $5.2 million for the six months ended
June 30, 1997. The increase in selling, general and administrative expenses
was primarily attributable to incremental owners' compensation and additional
personnel to support the growth in sales at Linford and an intentional shift
in business mix at Yale toward higher margin service contract work. As a
percentage of revenues, selling, general and administrative expenses increased
from 19.2% to 21.7% over the six month periods ended June 30, 1996 and 1997,
respectively.
Unaudited Fiscal 1996 Compared to Unaudited Fiscal 1995
Revenues. Revenues increased $8.0 million, or 20.8%, from $38.5 million in
fiscal 1995 to $46.5 million in fiscal 1996. The increase in revenues was
primarily volume driven and attributable to incremental service agreements at
Linford, incremental design and build projects at Mechanical Services and an
increase in maintenance, repair and replacement sales at Southeast Mechanical
and Sibley Services.
Gross Profit. Gross profit increased $1.8 million, or 16.5%, from $10.9
million in fiscal 1995 to $12.7 million in fiscal 1996. The largest factor
impacting the increase in gross profit was volume growth in revenues at
Linford, although the growth was at slightly lower margins. Additionally,
significant increases in gross profit were due to rapid service revenue growth
combined with margin expansion at All Service and Yale. Gross margin decreased
slightly from 28.2% to 27.2% between fiscal 1995 and fiscal 1996.
39
<PAGE>
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $1.3 million, or 14.3%, from $9.1 million in
fiscal 1995 to $10.4 million in fiscal 1996. The overall increase in selling,
general and administrative expenses was due to the expansion and relocation of
facilities as well as an increase in administrative and sales personnel at
Linford. As a percentage of revenues, selling, general and administrative
expenses decreased slightly from 23.7% to 22.3% in fiscal 1996.
Unaudited Fiscal 1995 Compared to Unaudited Fiscal 1994
Revenues. Revenues increased $5.3 million, or 16.0%, from $33.2 million in
fiscal 1994 to $38.5 million in fiscal 1995. The increase in revenues was
primarily volume driven and attributable to an increase in design and build
jobs at Yale and Mechanical and an increase in service agreement volumes at
Linford.
Gross Profit. Gross profit increased $1.5 million, or 16.0%, from $9.4
million in fiscal 1994 to $10.9 million in fiscal 1995. The increase in gross
profit was primarily attributable to a $2.0 million increase in revenues at
Linford at slightly higher margins, volume increases at Yale and Mechanical
and gross margin expansion at Charlie's and Arkansas Mechanical. As a
percentage of revenues, gross margin declined slightly from 28.4% in fiscal
1994 to 28.2% in fiscal 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 18.2%, from $7.7 million in
fiscal 1994 to $9.1 million in fiscal 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 23.1% to 23.7% due
primarily to an increase in owners' compensation of $503,000 and personnel
additions necessary to adequately manage the revenue growth at Linford.
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BUSINESS
GENERAL
The Company was founded in 1996 to create the leading nationwide provider of
HVAC, plumbing and electrical services to residential and commercial
customers. Since inception, the Company has acquired 11 Pre-Offering Companies
totaling $138.8 million in combined 1996 revenues and has definitive
agreements to acquire the 13 Offering Acquisition Companies upon the closing
of the Offering. After the Offering, the Company believes it will be one of
the largest diversified providers of HVAC, plumbing and electrical services in
the United States with operations in 37 cities in 21 states. The market for
these diversified services is approximately $100 billion. The Company's pro
forma 1996 revenue and income from operations were $307.5 million and $20.8
million, respectively, and combined historical revenues of the GroupMAC
Companies grew at an annual rate of 14.3% from 1994 through 1996.
The Company offers a comprehensive range of services to residential and
commercial customers in both the new installation and the maintenance, repair
and replacement segments of the HVAC, plumbing and electrical service
industries. The Company's services include installing and maintaining,
repairing and replacing central air conditioning systems, furnaces, heat pumps
and plumbing and electrical systems. Approximately 74%, 23% and 3% of the
Company's pro forma 1996 revenues were derived from HVAC, plumbing and
electrical and other services, respectively. Approximately 59% of pro forma
1996 revenues were derived from residential services and 41% from commercial
services, while 54% of pro forma 1996 revenues were from the new installation
segment and 46% were from the maintenance, repair and replacement services.
Through Callahan Roach and USA, the Company also provides consulting services
and sells products to over 1,300 independent HVAC and plumbing service
companies. The Company believes that its broad service offering and geographic
diversity provide several advantages, including the ability to offer its
commercial and residential customers a single source for a range of services,
to consolidate purchasing power with vendors, to capture business from
customers that operate on a regional and national basis, to mitigate the
effects of seasonality and to balance local or regional economic cycles.
The Company believes that it can maximize its long-term growth and
profitability by participating in both the new installation and the
maintenance, repair and replacement segments of the HVAC, plumbing and
electrical service industries. The new installation business is generally
characterized by higher volume sales to homebuilders, commercial developers
and other large customers. The maintenance, repair and replacement business
generally produces higher margins from services provided to a broader customer
base. The Company intends to focus on growing its maintenance, repair and
replacement business, to capitalize on the higher margins and the more
predictable nature of revenues associated with this segment and to target a
revenue mix of approximately 60% maintenance, repair and replacement and 40%
new installation over time. The Company derives considerable profits and
strategic value from its new installation business, as this segment generates
a database of potential customers for maintenance, repair and replacement
services. The higher volumes associated with consolidating a number of new
installation firms provide purchasing economies of scale that increase the
competitiveness of both the new installation and the maintenance, repair and
replacement segments.
INDUSTRY OVERVIEW
Based on available industry data, the Company believes the HVAC, plumbing
and electrical service industries in the United States represent a market with
annual revenues of approximately $100 billion. The HVAC service industry is
believed to generate approximately $65 billion in annual revenues, the
plumbing service industry generates approximately $19 billion in annual
revenues and the electrical service industry generates approximately $16
billion in annual revenues. The Company also believes these industries are
highly fragmented with over 100,000 businesses, consisting predominantly of
small, owner-operated companies focusing on a single local geographic area and
providing a limited range of services. The Company believes that the majority
of owners in its industry have limited access to adequate capital for
modernization, training and expansion and limited opportunities for liquidity
in their business. As a result of this fragmentation, three
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publicly traded consolidators have emerged in these markets. The combined
revenues of these consolidators and the Company represent less than 2% of the
revenues for the HVAC, plumbing and electrical markets.
Growth in the HVAC service industry is affected by a number of factors,
particularly (i) the aging of the installed base of equipment, (ii) the
increasing efficiency, sophistication and complexity of HVAC systems and (iii)
the increasing restrictions on the use of refrigerants commonly used in older
HVAC systems. These factors also mitigate the effect on the HVAC service
industry of economic cycles inherent in the traditional construction industry.
An aging installed base has also positively affected growth in the plumbing
service industry. Industry sources report that 75% of the kitchen market and
65% of the bath market now consist of remodeling rather than new construction.
Growth in electrical services is closely tied to the new construction markets,
although the retrofitting of existing structures is driven by increased demand
for computer networks and other modernization.
The HVAC, plumbing and electrical service industries can be broadly divided
into the new installation segment and the maintenance, repair and replacement
segment. The new installation segment includes the installation of HVAC,
plumbing and electrical systems in new homes and commercial buildings for
contractors, builders, developers and other users. The maintenance, repair and
replacement segment includes the maintenance, repair, replacement and
reconfiguration of existing systems in residential homes and commercial
buildings. In the HVAC industry, the new installation segment represents
approximately 34% of industry revenues, while the maintenance, repair and
replacement segment represents 66% of industry revenues.
The Company believes significant opportunities are available to a well
capitalized, national company employing professionally trained, customer-
oriented service technicians and providing a full complement of high quality
residential and commercial services in an industry that has been characterized
by inconsistent quality, reliability and pricing. In addition, the increasing
complexity of HVAC systems has led to a need for better trained technicians to
install, monitor and service these systems. The cost of recruiting, training
and retaining a sufficient number of qualified technicians makes it more
difficult for smaller HVAC companies to expand their businesses. The Company
also believes the highly fragmented nature of the residential and commercial
service industries will provide it with significant opportunities to
consolidate a large number of existing residential and commercial service
businesses.
OPERATING STRATEGY
The goal of the Company's operating strategy is to increase the revenues and
profitability of the GroupMAC Companies and subsequently acquired businesses,
while maintaining the highest level of service to its customers. The key
elements of the Company's operating strategy are as follows:
ACHIEVE OPERATING EFFICIENCIES. The Company intends to pursue significant
cost savings through the consolidation of purchasing power and to obtain
additional operating efficiencies through the implementation of a variety
of "best practices." It expects to achieve substantial purchasing economies
in the areas of equipment and supplies, service vehicles (including fuel
and maintenance), insurance and benefits, marketing and advertising, long
distance services and a variety of professional services. Callahan Roach
and USA, leading providers of integration, training and business consulting
services to the HVAC industry, will assist the Company in identifying and
refining its best practices and implementing such practices across the
GroupMAC Companies and future acquisitions through a systematic program of
training and consulting. In addition, the Company has recently established
a Council of Presidents consisting of the key operating management of
acquired companies, which will meet regularly to facilitate the sharing of
operating practices, synergies and strategies across the Company.
OPERATE ON A DECENTRALIZED BASIS. The Company intends to retain the
managers of the businesses it acquires, allow them to maintain substantial
responsibility for the day-to-day operations, profitability and growth of
those businesses and provide them with incentives based upon performance.
This will allow the Company to capitalize on the local market knowledge and
customer relationships at each acquired company. The Company believes that
the operating autonomy provided by this decentralized structure, together
with
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the implementation of reporting systems and financial controls at the
corporate level, will give it a competitive advantage in growing market
share and in attracting additional acquisition candidates.
ATTRACT, DEVELOP AND RETAIN HIGH QUALITY TECHNICIANS. The Company
believes operational success in this industry results from attracting and
retaining a highly trained and motivated workforce in order to deliver
consistently high-quality service at a fair price and to reduce re-work and
other costs. The Company's strategy is to become the employer of choice in
its industry by offering to its employees and managers a market-leading
combination of training, compensation and employee benefits, career
development opportunities and an equity participation in the Company's
success. Over time, the Company intends to develop an internal technical
training program to enhance the skill level of its employees.
ESTABLISH NATIONAL MARKET COVERAGE. The Company intends to expand its
existing relationships with home builders, commercial real estate
developers and property managers and other enterprises by offering
comprehensive HVAC, plumbing and electrical new installation and
maintenance, repair and replacement services on a national or regional
basis. The Company believes that significant demand exists from these
customers to utilize the services of a single company capable of providing
these services and that the GroupMAC Companies' many geographic locations
allow it to respond to this demand. Many of the GroupMAC Companies already
provide local or regional coverage to companies with nationwide operations.
In addition, the Company plans to utilize the customer bases of Callahan
Roach and USA, which are nationwide in scope, to establish an affiliate
network to market services on a national basis.
The Company began to implement its operating strategy following its
acquisition of the Pre-Offering Companies and has already entered into
negotiations with vendors in the areas of equipment and supplies, service
vehicles, casualty insurance, employee benefits, fuel supply arrangements,
Yellow Pages advertising, business forms and uniforms. Callahan Roach
personnel have conducted field visits with the GroupMAC Companies to assess
each company's operating strengths and weaknesses and to identify operating
best practices for use throughout the organization and are currently
developing customized training programs for the management and staff personnel
of these companies. Based on a study of the GroupMAC Companies' existing
benefit plans, the Company intends to implement a program that will preserve
or enhance the overall level of benefits resulting in projected cost savings
to the Company. The Company intends to issue, after the Offering, up to
1,899,581 stock options covering all eligible employees of the GroupMAC
Companies. In preparation for creation of a national account marketing
program, the Company is conducting a study of the national and regional
companies currently serviced by one or more of the GroupMAC Companies.
ACQUISITION STRATEGY
The Company's acquisition program is designed to enhance its position in
existing markets and to expand its operations into new markets. The key
elements of the Company's acquisition strategy are as follows:
ACQUIRE COMPANIES ACROSS MULTIPLE MARKET SEGMENTS. The Company intends to
acquire profitable businesses with well-developed market positions that are
engaged in the new installation and the maintenance, repair and replacement
segments of the HVAC, plumbing and electrical service industries in order
to develop synergies from the combined operations. For example, the Company
believes that new installation companies can be successfully teamed with
companies providing maintenance, repair and replacement services in the
same geographical markets, providing the latter with a new source of
service customers (purchasers of new homes) before these customers have a
chance to develop service relationships with other competitors. Likewise,
the combination of two or more companies providing complementary services
within a geographical market will enable the Company to offer to the
combined customer bases a wider range of services from a single supplier.
EXPAND GEOGRAPHIC PRESENCE. In new geographic markets, the Company will
target for acquisition one or more of the leading local or regional
companies in each market segment. Important criteria for these acquisition
candidates will be a reputation as a high quality provider and superior
operational management and systems. Once the Company has entered a market
it will seek to acquire other high quality service
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providers operating within the region in order to expand its market
penetration and the range of services it offers in that market. The Company
will also pursue "tuck in" acquisitions of smaller companies whose customer
bases, operating assets and service personnel can be incorporated into the
Company's existing operations without a significant increase in selling,
general and administrative costs.
RETAIN AND PROVIDE INCENTIVES TO EXISTING MANAGEMENT. The Company will
seek acquisitions of successful companies whose senior managers will remain
as employees of the Company and continue to operate their respective
businesses on a local level. The Company intends to motivate these managers
and align their interests with those of the Company by utilizing Common
Stock as a significant portion of the purchase consideration, by
establishing a key manager stock option plan for their benefit and by
implementing a cash bonus plan that rewards managers and key employees for
improvement in after-tax earnings that exceeds the cost of capital
employed.
LEVERAGE INDUSTRY REPUTATION AND CONTACTS. The Company intends to utilize
existing industry relationships established by its acquired companies and
Company management, as well as the industry-wide contacts of Callahan Roach
and USA, to develop a broad base of potential acquisitions. The Company
believes that its ability to acquire additional high quality companies will
be influenced by the level of success enjoyed by companies that have
previously joined with the Company, as well as the continuing efforts of
the Company and its operating subsidiaries to maintain a high profile in
the industry. The Company intends to remain actively involved in industry
organizations on the local and national level, working with independent
companies to support issues of interest to the Company and its operating
subsidiaries.
The Company began implementing the above strategies with the acquisition of
Airtron in May 1997 and has since acquired 8 other companies providing both
new installation and maintenance, repair and replacement services in the
residential and commercial HVAC, plumbing and electrical markets. The Pre-
Offering Companies have combined fiscal 1996 revenues of $138.8 million. After
the acquisition of the 13 Offering Acquisition Companies, the Company will
have operations in 37 cities in 21 states with combined 1996 revenues of
$307.5 million. The Company will have two or more companies offering
complementary services in four geographical markets (Houston, Dallas, Austin
and Indianapolis). Within certain of its markets (Dallas, Houston, San Antonio
and Cincinnati), the Company has acquired or is acquiring at the Offering
companies with a primary focus on maintenance, repair and replacement services
to augment its new installation businesses in these areas.
BEST PRACTICES
The Company believes that one of the most significant competitive advantages
of a consolidation company is its ability to identify the best marketing,
sales and operating practices within individual acquired companies and to
spread those best practices across all of its operating locations. The key to
successful implementation is having a disciplined approach to identifying the
desired practices, developing the procedures and related training to ensure
these practices are understood and implemented properly in the field
locations, and measuring systematically the operating performance of the
companies against benchmarks or standards to ensure that the practices are
effective.
The Company believes it enjoys a distinct competitive advantage in this area
resulting from its purchase of Callahan Roach and USA in July 1997. These two
organizations provide the Company with professional level capabilities in the
areas of integration, training and management development for both the
residential and commercial segments of its business. The Company intends to
utilize the expertise of these two industry-recognized GroupMAC Companies in
developing, implementing and monitoring its best practices. Both of these
organizations have extensive industry-wide experience from which to draw best
practices, in addition to the ideas and procedures that come from existing
GroupMAC Companies and future acquisitions. The Company believes that this
expertise, and the exploitation of best practices in this manner, will enable
the Company to accelerate the integration of acquired companies.
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Callahan Roach serves HVAC and plumbing contractors across the United States
in such areas as advertising, marketing, business valuation, pricing
strategies, management information services, acquisition planning and
integration and general consulting. It provides the Customer Assurance
Pricing(TM) models to over 1,300 HVAC and plumbing service companies. Callahan
Roach has been an industry leader in the development and commercialization of
this flat rate pricing best practice known as Customer Assurance Pricing(TM),
successfully marketing it to over 2,800 independent contractors across the
United States. Callahan Roach has developed and is currently field testing a
flat rate pricing software product (derived from its manual Customer Assurance
Pricing(TM) systems) that will run on hand-held computers for use by sales and
service personnel in the field. USA provides training and other products and
services to a network of 105 independent service companies focused on
maintenance, repair and replacement of commercial HVAC systems. The Company
believes that its acquisition of USA adds significant commercial HVAC
expertise to complement the residential HVAC and plumbing expertise provided
by Callahan Roach.
In order to ensure that best practices are shared among each of the
individual GroupMAC Companies, the Company has created a Council of Presidents
composed of the president or senior executive of each of the GroupMAC
Companies. The Council will meet on a regular basis, as well as divide into
smaller working committees, to share operating practices and develop
additional means to improve the overall performance of the Company and the
individual GroupMAC Companies. Best practices that result from the work of the
Council will be included in the training and monitoring programs developed and
disseminated through Callahan Roach and USA.
SERVICES PROVIDED
The Company provides a broad variety of maintenance, repair and replacement
services for HVAC, plumbing, electrical and other systems to both residential
and commercial customers. These services include preventive maintenance
(periodic checkups, cleaning and filter change-outs); emergency repairs; and
the replacement (in conjunction with the retrofitting or remodeling of a
residence or commercial building, or as a result of an emergency repair
request) of HVAC systems and associated parts, plumbing fixtures, pipes, water
feed and sewer lines, water heaters, softeners, filters and controls, and
electrical control systems, wiring, data cabling, switches and panels. The
Company also acts as a subcontractor for a variety of national, regional and
local residential home builders in the installation of HVAC, plumbing,
electrical and other systems in new residential construction, as well as
designing and installing HVAC, plumbing, electrical and other systems on
behalf of owners or general contractors in commercial buildings. In a few of
its operating locations, the Company provides certain specialized services,
including repair of home appliances, duct cleaning, installation and repair of
fireplaces, installation of fire sprinkler systems and the provision of
technical facilities management services to commercial building owners or
building managers. In connection with both its new installation business and
its maintenance, repair and replacement services, the Company sells a wide
range of HVAC, plumbing and electrical equipment, parts and supplies.
The following table shows the approximate percentages of the revenues of the
combined GroupMAC Companies during fiscal 1996 represented by new installation
services and maintenance, repair and replacement services, respectively.
<TABLE>
<CAPTION>
ELECTRICAL
HVAC PLUMBING & OTHER TOTAL
---- -------- ---------- -----
<S> <C> <C> <C> <C>
Residential Services:
New Installation............................... 26% 16% --% 42%
Maintenance, Repair and Replacement............ 13% 2% 2% 17%
--- --- --- ---
Total Residential............................ 39% 18% 2% 59%
Commercial Services:
New Installation............................... 10% 2% --% 12%
Maintenance, Repair and Replacement............ 25% 3% 1% 29%
--- --- --- ---
Total Commercial............................. 35% 5% 1% 41%
</TABLE>
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The Company intends to make additional acquisitions across the three main
technical disciplines (HVAC, plumbing and electrical) within the residential
and commercial markets. The Company's long term objective is to develop
maintenance, repair and replacement capabilities (both residential and
commercial) in the top 100 markets within the United States, while offering
new installation services across a more limited range of markets where new
construction in the residential and/or commercial sectors is expected to out-
pace the national average over the long term. Over time, this objective is
expected to shift the revenues of the Company to an increased percentage of
service revenue. See "--Operating Strategy" and "--Acquisition Strategy."
FIELD OPERATIONS
The Company's field operations are conducted out of the individual operating
locations of the various GroupMAC Companies. Typically, the GroupMAC Companies
specialize in one of the technical disciplines in either the residential or
commercial market. However, a few of the GroupMAC Companies that operate
principally in the residential new installation or residential maintenance,
repair and replacement markets also engage to a limited extent in projects or
service work for "light commercial" customers (i.e., smaller commercial
buildings where systems are similar in design to residential systems). In
addition, six of the GroupMAC Companies offer services in more than one
technical discipline. The Company permits the GroupMAC Companies to function
in a largely autonomous manner in delivering products and services to their
respective markets. The Company believes this flexible operating strategy
improves each location's ability to respond quickly to opportunities and
competition.
New Installation
New installation service in the residential market begins with the home
builder providing architectural plans or mechanical drawings for the
particular type or types of residences within the tract to be developed, and
requesting a bid or contract proposal for the work (often broken into phases
within the tract). Company personnel analyze the plans and drawings and
estimate the equipment, materials and parts and the direct and supervisory
labor required for the project. The company delivers a written bid or
negotiates the written agreement for the job. In HVAC installations, a portion
of the required air ducts are fabricated and pre-assembled with other
components in the company's own facilities prior to delivery to the job site.
Other equipment and materials for the particular project are ordered from
manufacturers, distributors or other suppliers for delivery in time for the
scheduled onsite construction work. The installation work is coordinated by
the company's field supervisors along with the builder's construction
supervisors. Draw payments for the project are generally obtained within 30
days of completing the installation, at which time any mechanics' and
materialmen's liens securing such payments are released. Interim payments are
often obtained to cover labor and materials costs on larger installation
projects. During 1996, the GroupMAC Companies were involved in the
installation of approximately 18,000 HVAC systems and 6,500 plumbing systems
in new residences.
Commercial new installation work begins with a design request from the owner
or general contractor. Initial meetings with the parties allow the contractor
to prepare preliminary and then more detailed design specifications,
engineering drawings and cost estimates. Once a project is awarded, it is
conducted in pre-agreed phases and progress billings are rendered to the owner
for payment, less a retainage. Actual field work (ordering of equipment and
materials, fabrication or assembly of certain components, delivery of such
materials and components to the job site, scheduling of work crews with the
necessary skills, and inspection and quality control) is coordinated in these
same phases. During 1996, the GroupMAC Companies were involved in the
installation of approximately 480 HVAC systems and 95 plumbing systems in new
commercial facilities. The Company has established a policy to review and
approve any new installation project by a GroupMAC Company which exceeds 5% of
the projected annual revenue of that GroupMAC Company.
Substantially all the equipment and component parts the Company sells or
installs are purchased from manufacturers and other outside suppliers. The
Company is not materially dependent on any of these outside sources.
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Maintenance, Repair and Replacement
The GroupMAC Companies engaged in maintenance, repair and replacement
services use specialized systems to log service orders, schedule service
calls, identify and ready the necessary repair parts or equipment, track the
work order, provide information for communication with the service technicians
and customers, and prepare accurate invoices. Service histories and specific
product information are generally accessible to the dispatcher in a database
that may be searched by customer name or address. Maintenance, repair and
replacement service calls are initiated when a customer requests emergency
repair service or the Company calls the client to schedule periodic service
agreement maintenance. Service technicians are scheduled for the call or
routed to the customer's residence or business by the dispatcher via a
scheduling board or daily work sheet (for non-emergency service) or through
cellular telephone, pager or radio. Service personnel work out of the
Company's service vehicles, which carry an inventory of equipment, tools,
parts and supplies needed to complete the typical variety of jobs. The
technician assigned to a service call travels to the residence or business,
interviews the customer, diagnoses the problem, prepares and discusses a price
quotation, performs the work and often collects payment from the customer.
Service technicians of GroupMAC Companies that are existing clients of
Callahan Roach carry a Customer Assurance Pricing(TM) manual which lists labor
and equipment parts required to fulfill certain tasks and the associated
prices. This manual is custom generated for each company from a database
containing over 15,000 different repair operations and which is updated for
price changes periodically. This "flat rate pricing" strategy allows the
Company to monitor margins and labor productivity at the point of sale, while
increasing the level of customer satisfaction by demonstrating greater
fairness and objectivity in pricing. Payment for maintenance, repair and
replacement services not covered by a warranty or service contract is
generally requested in cash or by check or credit card at the service
location. During fiscal 1996, the GroupMAC Companies performed approximately
150,000 service calls for periodic maintenance under existing service
contracts, and approximately 175,000 emergency or other service calls.
A portion of the Company's service work is done to satisfy factory
warranties. For such services, the Company is generally compensated by the
manufacturer responsible for the defective equipment under warranty. The
Company attempts to enter into service contracts whereby the customer pays an
annual or semi-annual fee for periodic diagnostic services. The customers
under service contracts receive specific discounts from standard prices for
repair and replacement service.
CENTRALIZED SUPPORT SERVICES
The Company provides certain management, financial, accounting and
logistical support services for all of the GroupMAC Companies, including the
following:
Purchasing
The Company believes it will be able to structure volume purchasing
arrangements or otherwise achieve purchasing economies of scale in the
following areas: (i) HVAC, plumbing and electrical equipment, parts and
supplies, (ii) purchase or lease and maintenance of service vehicles, (iii)
casualty and liability insurance, (iv) health insurance and related benefits,
(v) retirement benefits administration, (vi) office equipment, (vii) marketing
and advertising (including Yellow Pages), (viii) long distance services and
(ix) a variety of accounting, financial management, marketing and legal
services. The principal manufacturers or suppliers of the products sold by the
Company include Carrier Air Conditioning, Inc., The Trane Company, Lennox
Industries, Inc., Goodman Manufacturing Corp. and Ferguson Enterprises, Inc.
Each GroupMAC Company will have the opportunity to order products from the
manufacturers or distributors at the discounted rate negotiated by the Company
and therefore, benefit from the Company's purchasing power while maintaining
existing supplier relationships.
Management Information Systems
With limited exceptions, the Company intends to continue to operate for the
near-term with the existing accounting and other computer systems currently in
place at the various GroupMAC Companies. The Company
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will, however, cause each of the GroupMAC Companies to adopt a uniform chart
of accounts and to standardize their budgeting process and reports so that
results among the GroupMAC Companies more easily can be compared and
integrated. In addition, where a GroupMAC Company or a future acquired company
has a system in place that is inadequate for its existing or near term needs,
the Company will begin the migration to a standard that will allow for greater
consistency (and a longer term change to a Company-wide, integrated system).
The Company has implemented regular financial and operational "flash reports"
and other mechanisms to allow for management control and oversight. The
Company will utilize this information to establish and monitor performance of
individual GroupMAC Companies against operating benchmarks and ratios.
Employee Screening, Training and Development
The Company is committed to providing the highest level of customer service
through the development of a highly trained workforce. Prior to employment,
the Company makes an assessment of the technical competence level of all
potential new employees, confirms background references and conducts criminal
and driving record checks. In addition, all employees of the Company are
subject to random drug testing. Once hired, employees of the Company are
required to complete a progressive training program to advance their technical
competencies and to ensure that they understand and follow the Company's
safety practices and other internal policies. Both technical and customer
service personnel are given intensive training in customer communication,
sales and problem-solving skills.
The Company also conducts a detailed internal evaluation of each acquired
company's strengths, weaknesses and compliance with recognized industry or
Company "best practices," and then designs a training program to develop and
enhance the communication, sales, management and other relevant skills of its
employees and management to bring about continuous improvement in these areas.
The Company acquired Callahan Roach and USA in part for their professional
training and consulting capabilities and intends to implement their market-
leading training programs within the GroupMAC Companies.
Advertising and Marketing
The Company intends to capitalize on cross-marketing and business
development opportunities that it believes will be available to the Company as
a national provider of comprehensive residential and commercial HVAC, plumbing
and electrical services. The Company will leverage the diverse technical and
marketing strengths of individual GroupMAC Companies to expand the overall
penetration of services within those local markets in which two or more
GroupMAC Companies are located. Eventually, the Company intends to offer
comprehensive services from all of its operating locations.
The GroupMAC Companies use both general advertising and a direct sales force
to market their residential and commercial services (both new installation and
repair services) in their respective geographic markets. The Company is
developing a marketing and advertising program to establish a national brand
identity while preserving and enhancing the value of the unique and long-
standing trade names and customer identification enjoyed by the individual
GroupMAC Companies. The GroupMAC logo and identifying marks will be featured
on service trucks, marketing materials and advertising of the GroupMAC
Companies, but in a manner that does not detract from the local brand. The
Company proposes to develop (initially for the GroupMAC Companies, but
ultimately for delivery to the market through licensed affiliates developed by
Callahan Roach and USA) market-leading warranty and service programs for the
residential and commercial markets, as well as an aggressive national account
sales program focused on national and large regional home builders, as well as
major corporations, governmental and private institutions, real estate
investment trusts, real estate management firms and other multi-location
commercial property owners and managers. In 1996, advertising and marketing
expenditures represented 0.9% of the Company's combined revenue.
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PROPERTIES AND VEHICLES
The Company operates a fleet of approximately 1,580 owned or leased service
trucks, vans and support vehicles. It believes these vehicles generally are
well-maintained, ordinary wear and tear excepted, and adequate for the
Company's current operations.
The Company has a total of 54 facilities, one of which it owns and 53 of
which are under leases with remaining terms ranging from four months to 15
years from the date hereof on terms the Company believes to be commercially
reasonable. The aggregate of the leased or owned space at the Company's
facilities is approximately 600,000 square feet. A majority of the Company's
facilities are leased from certain former shareholders (or entities controlled
by certain former shareholders) of the GroupMAC Companies. None of these
leases expire prior to 2000. The provisions of the leases are on terms the
Company believes to be at least as favorable to the Company as could have been
negotiated by the Company with unaffiliated third parties. The Company
believes the owned and leased facilities are adequate to serve its current
level of operations.
The Company believes that it has generally satisfactory title to the
property owned by it, subject to the liens for current taxes, liens incident
to minor encumbrances and easements and restrictions that do not materially
detract from the value of such property or the interests therein or the use of
such property in its business.
COMPETITION
The market for HVAC, plumbing and electrical services is highly competitive.
The Company believes that the principal competitive factors in the residential
and commercial services industry are (i) timeliness, reliability and quality
of services provided, (ii) range of services offered, (iii) market share and
visibility and (iv) price. The Company believes its strategy of creating a
leading national provider of comprehensive services directly addresses these
factors. The ability of the Company to employ, train and retain highly
motivated service technicians to provide quality services should be enhanced
by its ability to utilize professionally managed recruiting and training
programs. In addition, the Company expects to offer compensation, health and
savings benefits that are more comprehensive than most offered in the
industry, including a stock option plan for all employees. Service quality
should be enhanced by the implementation and continuous reinforcement of best
practices across the GroupMAC Companies. Competitive pricing is possible
through purchasing economies and other cost saving opportunities that exist
across each of the service lines offered and from productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single market. Certain of these smaller competitors may
have lower overhead cost structures and may be able to provide their services
at lower rates. Moreover, many homeowners have traditionally relied on
individual persons or small repair service firms with whom they have long-
established relationships for a variety of home repairs. There is currently a
limited number of public companies focused on providing residential or
commercial services in some of the same service lines provided by the Company.
In addition, there are a number of national retail chains that sell a
variety of plumbing fixtures and equipment, and HVAC equipment for residential
use and offer, either directly or through various subcontractors,
installation, warranty and repair services. Other companies or trade groups
engage in franchising their names and marketing programs in some service
lines. In the future, competition may be encountered from, among others, HVAC
equipment manufacturers, the unregulated business segments of regulated gas
and electric utilities or from newly deregulated utilities entering into
various residential service areas. Certain of the Company's competitors and
potential competitors have greater financial resources than the Company to
finance residential services acquisition and development opportunities, to pay
higher prices for the same opportunities or to develop and support their own
residential services operations if they decide to enter the field.
49
<PAGE>
EMPLOYEES
As of August 1, 1997, the Company and the GroupMAC Companies had
approximately 2,860 full and part-time employees, approximately 1,825 of which
are installation/service technicians. In the course of performing installation
work, the Company may utilize the services of subcontractors. Approximately
500 employees (in five of the commercial GroupMAC Companies) are members of
the Bridge, Structural and Ornamental Iron Workers, Construction Building
Material, Ice and Coal Drivers, Helpers and Inside Employees, Mechanical
Contractors, Mechanical Services, Pipe-fitters, Plumbing and Pipe-fitters and
Sheet Metal Workers, Air Conditioning Contractors, Stationary Engineers and
Electrical Contractors unions, and work under collective bargaining
agreements. Two of such agreements recently expired and are now on a year-to-
year basis and may be renegotiated after either side gives the requisite
notice (90 days in one case and 120 days in the other). The other collective
bargaining agreements have expiration dates between April 30, 1998 and August
16, 2000. Employees at K&N's operations in Las Vegas, Nevada, are currently
being solicited to join a union, and from time to time other operating
locations of the Company may experience union organizing effort. The Company
believes its relationship with its employees is satisfactory.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various legal proceedings,
most of which pertain to contract installation, service and employee matters
arising in the ordinary course of business. Although no assurance can be
given, the Company believes that the outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
its financial condition or results of operations.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (i) permitting
and licensing requirements applicable to service technicians in their
respective trades, (ii) building, HVAC, plumbing and electrical codes and
zoning ordinances, (iii) laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services, and (iv) laws and regulations relating to worker safety and
protection of human health and the environment. In Florida, warranties
provided for in the Company's service agreements subject the Company and such
agreements to some aspects of that state's insurance laws and regulations.
Specifically, the Company is required to maintain funds on deposit with the
Florida Office of Insurance Commissioner and Treasurer, the amount of which is
not material to the Company's business. The Company is in compliance with
these deposit requirements.
The Company believes it has all required permits and licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential
services trades require various permits and licenses to be held by
individuals. In some cases, a required permit or license held by a single
individual may be sufficient to authorize specified activities for all the
Company's service technicians who work in the geographic area covered by the
permit or licenses.
The Company's operations are subject to numerous federal, state and local
environmental laws and regulations, including those governing vehicle
emissions and the use and handling of refrigerants. These laws are
administered by the United States Environmental Protection Agency, the Coast
Guard, the Department of Transportation and various state and local
governmental agencies. The technical requirements of these laws and
regulations are becoming increasingly complex, stringent and expensive.
Federal and state environmental laws include statutes intended to allocate the
cost of remedying contamination among specifically identified parties. CERCLA
(or "Superfund") can impose strict, joint and several liability on past and
present owners or operators of facilities at, from, or to which a release of
hazardous substances has occurred, on parties who generated hazardous
substances that were released at such facilities and on parties who arranged
for the transportation of
50
<PAGE>
hazardous substances to such facilities. A majority of states have adopted
"Superfund" statutes comparable to, and in some cases more stringent than,
CERCLA. If the Company were to be found to be a responsible party under CERCLA
or a similar state statute, the Company could be held liable for all
investigative and remedial costs associated with addressing such
contamination, even though the releases were caused by a prior owner or
operator or third party. In addition, claims alleging personal injury or
property damage may be brought against the Company as a result of alleged
exposure to hazardous substances resulting from the Company's operations.
Prior to entering into the agreements relating to the acquisition of the
GroupMAC Companies, the Company evaluated the properties owned or leased by
such companies and in some cases engaged an independent environmental
consulting firm to conduct or review assessments of environmental conditions
at certain of those properties. No material environmental problems were
discovered in these reviews, and the Company is not otherwise aware of any
actual or potential environmental liabilities that would be material to the
Company. There can be no assurance that all such liabilities have been
identified, that such liabilities will not occur in the future, that a party
could not assert a material claim against the Company with respect to such
liabilities, or that the Company would be required or able to answer for such
claim.
The Company's operations are subject to federal, state and local laws and
regulations protecting the health and safety of workers. These laws are
administered by the federal Occupational Safety & Health Administration and
state and local health and safety governmental agencies. The Company's
operations are subject to the Clean Air Act, Title VI of which governs air
emissions and imposes specific requirements on the use and handling of
substances known or suspected to cause or contribute significantly to harmful
effects on the stratospherical ozone layer, such as chlorofluorocarbons and
certain other refrigerants ("CFCs"). Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
systems, equipment and appliances containing these refrigerants and also
regulate the containment and recycling of these refrigerants. These
requirements have increased the Company's training expenses and expenditures
for containment and recycling equipment. The Clean Air Act is intended
ultimately to eliminate the use of CFCs in the United States and require
alternative refrigerants to be used in replacement HVAC systems. The
implementation of the Clean Air Act restrictions has also increased the cost
of CFCs in recent years and is expected to continue to increase such costs in
the future. As a result, the number of conversions of existing HVAC systems
that use CFCs to systems using alternative refrigerants is expected to
increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles
in large vehicle fleets to use "alternative fuels," such as compressed natural
gas or propane, and meet reduced emissions standards. The Company does not
anticipate that the cost of fleet conversion that may be required under
current laws will be material. Future costs of compliance with these laws will
be dependent upon the number of vehicles purchased in the future for use in
the covered geographic regions, as well as the number and size of future
business acquisitions by the Company in these regions. The Company cannot
determine to what extent its future operations and earnings may be affected by
new regulations or changes in existing regulations relating to vehicle
emissions.
Capital expenditures related to environmental matters during fiscal 1996
were not material. The Company does not currently anticipate any material
adverse effect on its business or consolidated financial position as a result
of future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. Future events,
however, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies or
stricter or different interpretations of existing laws and regulations may
require additional expenditures by the Company which may be material.
51
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company upon completion of the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James P. Norris............. 58 Chairman of the Board; Director
J. Patrick Millinor, Jr..... 52 Chief Executive Officer; Director
Donald L. Luke.............. 60 President and Chief Operating Officer; Director
William Michael Callahan.... 51 Executive Vice President-Training, Technology
and Field Support
Chester J. Jachimiec........ 42 Executive Vice President-Acquisitions; Director
Alfred R. Roach, Jr......... 53 Executive Vice President-Marketing, Sales and
Product Support
Richard S. Rouse............ 51 Executive Vice President-Corporate Development
and Administration; Director
Randolph W. Bryant.......... 46 Senior Vice President, General Counsel and
Secretary
Darren B. Miller............ 37 Senior Vice President and Chief Financial
Officer
James D. Jennings........... 55 President and Chief Executive Officer of
Airtron; Director
Timothy Johnston............ 41 Senior Vice President of Airtron; Director
John M. Sullivan............ 61 Director
James D. Weaver............. 48 Director
Ronald D. Bryant............ 50 Director
David L. Henninger.......... 53 Director
Andrew Jeffrey Kelly........ 43 Director
Thomas B. McDade............ 74 Director
Lucian Morrison............. 60 Director
Fredric Sigmund............. 56 Director
</TABLE>
JAMES P. NORRIS became a Director and Chairman of the Board of the Company
in June 1997. From 1969 to May 1997, he served as Executive Vice President of
Air Conditioning Contractors of America ("ACCA"), an industry trade
association based in Washington, D.C.
J. PATRICK MILLINOR, JR. became a Director and Chief Executive Officer of
the Company upon its formation in 1997. From April 1997 to August 1997, he
served as President of the Company. From October 1996 through April 1997, he
served as Chief Executive Officer of the Company's predecessor, GroupMAC
Management Co. ("Management Co."). From September 1994 to October 1996, Mr.
Millinor worked directly for Gordon Cain, a major stockholder in the Company,
assisting in the formation and management of Agennix Incorporated and Lexicon
Genetics, two biotechnology companies. From March 1993 to September 1994, he
served as Chief Executive Officer of UltrAir, Inc., a start-up passenger
airline. From October 1992 to March 1993, he served as Chief Financial Officer
of UltrAir, Inc. From 1991 to 1992, he served as Chief Financial Officer of
Lifeco Travel Services, a travel management company. From 1986 to 1991, Mr.
Millinor served as Chief Operating Officer and Senior Vice President,
respectively, of Commonwealth Savings Association and Bank United. From 1979
to 1986, Mr. Millinor was a partner with KPMG Peat Marwick LLP. He currently
serves as a director of Agennix Incorporated, Haelan Health(R) Corporation and
Lexicon Genetics.
DONALD L. LUKE became a Director and President and Chief Operating Officer
of the Company in August 1997. From November 1996 to July 1997, he served as
Chairman of Arriva Air International, Inc. a start-up commercial air cargo
business. From September 1996 to August 1997, he served as a consultant to
Batteries Batteries, Inc., a consolidator of specialty battery distribution
companies which completed its initial public offering in April 1996. From 1995
to September 1996, he served as President, Chief Executive Officer and
52
<PAGE>
Director of Batteries Batteries, Inc. From 1991 to 1995, Mr. Luke served as
President and Chief Executive Officer of Miracle Ear New York City. From 1989
to 1991, he served as President and Chief Executive Officer of Senior Service
Corporation. From 1988 to 1989, he served as Chairman and Chief Executive
Officer of Cuisinarts, Inc. From 1987 to 1988, he served as President and
Chief Operating Officer of Aetmedia, Inc. From 1981 to 1987, he served as
President and Chief Operating Officer and a director of Chemlawn Services
Corporation. He is currently the Chief Executive Officer of CTW, Inc. a
privately held acquisitions and management company, and a partner in McFarland
Grossman Capital Ventures, L.C., a consolidator of fastener distribution
companies.
WILLIAM MICHAEL CALLAHAN became Executive Vice President-Training,
Technology and Field Support of the Company in August 1997. From 1989 to July
1997, Mr. Callahan was a partner in Callahan Roach & Associates. From 1972 to
1989, Mr. Callahan served as President of Capital City Heating & Cooling, a
company he founded. In 1988, Mr. Callahan served as President of ACCA.
CHESTER J. JACHIMIEC became a Director and Executive Vice President-
Acquisitions of the Company upon its formation in 1997. From October 1996 to
April 1997, he served as Executive Vice President-Acquisitions at the
Company's predecessor, Management Co. From February 1994 to October 1996, Mr.
Jachimiec served as the Director of Acquisitions & Investments for Tenneco
Energy. From 1990 to 1994, he was an investor in or consultant to various
private ventures engaged in natural gas gathering, processing and exploration
as well as computer software development. Prior to 1990, Mr. Jachimiec
practiced securities law and public accounting with several professional
firms.
ALFRED R. ROACH, JR. became Executive Vice President-Marketing, Sales and
Product Support of the Company in August 1997. From 1989 to July 1997, Mr.
Roach was a partner in Callahan Roach & Associates. From 1986 to 1989, he
served as President and General Counsel of Service America Corporation, an
HVAC franchise company. From 1970 to 1986, Mr. Roach engaged in the private
practice of law.
RICHARD S. ROUSE became a Director and Executive Vice President-Corporate
Development and Administration of the Company upon its formation in 1997. From
October 1996 to April 1997, he served as Executive Vice President-Corporate
Development and Administration of the Company's predecessor, Management Co.
From July 1994 to July 1996, Mr. Rouse served as Vice President and General
Manager of Southcoast Services, a privately held landfill operating company.
From 1992 to 1994, he served as Vice President and General Manager of SWS, an
industrial services company. From 1990 to 1991, he was a co-founder and Senior
Vice President-Corporate Development for Republic Waste Industries, Inc. From
1984 to 1990, he was Marketing Manager of Lubripac, a blender and packager of
lubricants and specialty chemicals. Prior to 1984, Mr. Rouse served in various
marketing and management capacities with the Exxon Chemical Company.
RANDOLPH W. BRYANT became Senior Vice President, General Counsel and
Secretary of the Company upon its formation in 1997. From December 1996 to
April 1997, Mr. Bryant served as Associate General Counsel of El Paso Natural
Gas Company. From 1984 to 1996, he was an attorney with Tenneco Inc. and
Tenneco Energy Inc., last serving as Associate General Counsel.
DARREN B. MILLER became Senior Vice President and Chief Financial Officer of
the Company upon its formation in 1997. From October 1996 to April 1997, he
served as Senior Vice President and Chief Financial Officer of the Company's
predecessor, Management Co. From 1989 to 1996, Mr. Miller served in several
capacities at Allwaste, Inc., a consolidator of industrial service companies,
including Vice President-Treasurer and Controller from 1995 to 1996. Prior to
1989, he was employed in the audit practice of Arthur Andersen LLP.
JAMES D. JENNINGS became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1985, Mr. Jennings has served as
President, Chief Executive Officer and a director of Airtron. Prior to 1985,
Mr. Jennings was employed by Airtron in various other capacities.
TIMOTHY JOHNSTON became a Director of the Company in May 1997 in connection
with the acquisition of Airtron. Since 1995, Mr. Johnston has served as a
Senior Vice President of Airtron. Mr. Johnston has served as
53
<PAGE>
Secretary/Treasurer of Airtron since 1991 and as Chief Financial Officer of
Airtron since 1988. Prior to 1987, Mr. Johnston was employed by Airtron in
various other capacities.
JOHN M. SULLIVAN became a Director of the Company upon its formation in
1997. From October 1996 to April 1997, he served as a Director of the
Company's predecessor, Management Co. Since 1994, Mr. Sullivan has been
engaged as an independent financial and tax consultant. From 1992 through
1994, he was an International Tax Director for General Motors Corporation.
Prior to 1992, Mr. Sullivan was a tax partner with Arthur Andersen LLP. He
currently serves as a director of Atlantic Coast Airlines, Inc.
JAMES D. WEAVER became a Director of the Company upon its formation in 1997.
From October 1996 to April 1997, he served as a Director at the Company's
predecessor, Management Co. Mr. Weaver has been the President of the Gordon
and Mary Cain Foundation, a nonprofit organization, since 1988 and the
Director of the Good Samaritan Foundation, a nonprofit organization, since
1986.
RONALD D. BRYANT will become a Director upon consummation of the Offering.
He founded Masters in 1986 and has served as its president since that time and
will continue in that capacity after consummation of the Offering.
DAVID L. HENNINGER will become a Director upon consummation of the Offering.
He acquired Van's in 1975, has served as its president since that time and
will continue in that capacity after consummation of the Offering.
ANDREW JEFFREY KELLY will become a Director upon consummation of the
Offering. He founded K&N in 1979, has served as its president since that time
and will continue in that capacity after consummation of the Offering.
THOMAS B. MCDADE will become a Director upon consummation of the Offering.
He has been engaged in consulting and managing his personal investments since
1985. From 1957 to 1985, he was employed by Texas Commerce Bancshares, last
serving in the capacity of Vice Chairman. He has been Chairman of the Board of
TransTexas Gas Corp. since 1993. He served as a director and trustee of eleven
registered investment companies from 1985 to 1995 for which John Hancock Funds
serves as investment advisor in Boston, Massachusetts. He currently serves as
a director of Bankers Trust Co. of the Southwest, TransAmerican Energy Corp.
and TransAmerican Refining Corp.
LUCIAN MORRISON will become a Director upon consummation of the Offering. He
has been engaged as a trustee and consultant with respect to trust, estate,
probate and qualified plan matters since 1992. From 1979 until 1990, he served
as Chief Executive Officer of Heritage Trust Company. From 1990 through 1991,
he served as Chief Fiduciary Officer of Northern Trust Company.
FREDRIC SIGMUND will become a Director upon consummation of the Offering.
Since 1986, he has served as Chief Executive Officer of MacDonald-Miller. From
1967 to 1986, he served in various positions with MacDonald-Miller.
Effective upon the consummation of the Offering, the Board of Directors of
the Company will consist of 15 members divided into three classes of five
directors serving staggered three-year terms expiring at the annual meeting of
shareholders in 1998, 1999 and 2000, respectively. At each annual meeting of
shareholders, one class of directors will be elected for a full term of three
years to succeed the class of directors whose terms are expiring.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees--the Audit
Committee, the Compensation Committee and the Acquisition Committee. Pursuant
to resolutions of the Board, these committees have the following described
responsibilities and authority.
54
<PAGE>
The Audit Committee has the responsibility, among other things, of (i)
recommending the selection of the Company's independent public accountants,
(ii) reviewing and approving the scope of the independent public accountants'
audit activity and extent of non-audit services, (iii) reviewing with
management and such independent public accountants the adequacy of the
Company's basic accounting system and the effectiveness of the Company's
internal audit plan and activities, (iv) reviewing with management and the
independent public accountants the Company's financial statements and
exercising general oversight of the Company's financial reporting process and
(v) reviewing with the Company litigation and other legal matters that may
affect the Company's financial condition, and monitoring compliance with the
Company's business ethics and other policies. As of the date of this
Prospectus, no members have been appointed to the Audit Committee.
The Compensation Committee has the responsibility, among other things, of
(i) establishing the salary rates of officers and employees of the Company and
its subsidiaries, (ii) examining periodically the compensation structure of
the Company and (iii) supervising the welfare and pension plans and
compensation plans of the Company. The members of the Compensation Committee
are Messrs. Sullivan (Chair) and Weaver.
The Acquisition Committee has the authority to approve the terms and
conditions of acquisitions by the Company of businesses having less than $40
million of revenues and $20 million of assets, including the authority to
approve the issuance of debt and equity securities of the Company in
connection with such acquisitions, provided that the consideration paid by the
Company for each such business is less than $20 million. The members of the
Acquisition Committee are Messrs. Millinor (Chair), Jachimiec and Rouse.
The Company's Board may also establish other committees.
DIRECTOR COMPENSATION
In October 1996, the Company granted to each of Messrs. Sullivan and Weaver
options to purchase 10,000 shares of Common Stock at a price of $3.08 per
share. Between the grant of such options and the date of this Prospectus,
directors of the Company have not received compensation for their services as
directors nor have they received compensation for attending the Company's
board meetings. After the Offering, the Company intends to grant to directors
of the Company who are not employees of the Company or its subsidiaries an
option to purchase 4,000 shares of Common Stock at a purchase price per share
equal to the fair market value of one share of Common Stock on the date of
grant. Such options will remain in effect for five years after the date of
grant and 800 shares of each such grant will become exercisable each year. If
a director ceases to serve in such capacity because of his death, disability
or retirement, the options granted to that director will become exercisable
for a one-year period. Each director also will be reimbursed for travel
expenses incurred for each meeting of the Board or for each Board Committee
meeting attended.
EXECUTIVE COMPENSATION
The Company did not conduct any operations other than activities related to
the acquisition of the GroupMAC Companies prior to May 2, 1997 and did not pay
any compensation prior to October 1996. The Company anticipates that during
1997 its most highly compensated executive officers (the "Named Executive
Officers") and their annualized base salaries will be: Mr. Norris--$150,000;
Mr. Millinor--$150,000; Mr. Luke--$150,000; Mr. Jennings--$150,000; Mr.
Johnston--$150,000; Mr. Callahan--$150,000; and Mr. Roach--$150,000. Pursuant
to the terms of their employment agreements with the Company, the annual base
salaries of each of the Named Executive Officers named above are subject to
upward adjustment effective one year from the effective date of the employment
agreement. The effective dates of the employment agreements of the Named
Executive Officers are as follows: Mr. Millinor, October 24, 1996; Messrs.
Jennings and Johnston, April 30, 1997; Mr. Norris, June 1, 1997; and Messrs.
Luke, Callahan and Roach, August 1, 1997. Each of the Named Executive Officers
is eligible to earn additional performance based incentive compensation for
1997. None of the executive officers is expected to receive perquisites the
value of which exceeded the lesser of $50,000 or 10% of the salary and bonus
of such executive.
55
<PAGE>
OPTION GRANTS
The following table sets forth the number of options to purchase shares of
Common Stock that have been granted to the Named Executive Officers since the
formation of the Company:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
--------------------- STOCK PRICE
OPTIONS % OF TOTAL EXERCISE APPRECIATION FOR
GRANTED OPTIONS PRICE OPTION TERM(3)
(NO. OF GRANTED TO PER ----------------
SHARES)(1) EMPLOYEES(2) SHARE EXPIRATION DATE 5% 10%
---------- ------------ -------- ---------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
James P. Norris......... 28,000 7.4% $3.08 June 1, 2007 $54,236 $137,444
J. Patrick Millinor,
Jr..................... 50,000 13.2 3.08 October 24, 2006 96,850 245,436
Donald L. Luke.......... 14,000 3.7 3.08 August 1, 2007 27,118 68,722
James D. Jennings....... -- -- -- -- -- --
Timothy Johnston........ -- -- -- -- -- --
W. Michael Callahan..... -- -- -- -- -- --
Alfred R. Roach, Jr..... -- -- -- -- -- --
</TABLE>
- --------
(1) The options reported in this column consist of Non-Qualified Options
granted under Stock Option Agreements between the Company and each of the
Named Executive Officers. The options will become exercisable on each of
the first, second and third anniversaries of the date of grant with
respect to one-third of the shares subject to the option. In the case of
Mr. Millinor's options, the three annual vesting periods are accelerated
in the event the closing price of the Common Stock over ten consecutive
trading days exceeds $17.50, $22.50 and $27.50 per share, respectively.
(2) Based on outstanding options to purchase an aggregate of 378,800 shares of
Common Stock.
(3) The dollar amounts under these columns are the result of calculations at
the 5% and 10% appreciation rates set by the Securities and Exchange
Commission (the "Commission") and, therefore, are not intended to forecast
possible future appreciation, if any, in the price of the Common Stock. In
order to realize the potential values set forth in the 5% and 10% columns
of this table, the per share price of the Common Stock would be $5.02 and
$7.99, respectively, or 63% and 159% respectively, above the base exercise
price. Because the Common Stock was not publicly traded prior to the
Offering, these amounts were calculated based on the assumption that the
fair market value of one share of Common Stock on the date of grant was
equal to the exercise price.
The following table sets forth the number of options to purchase shares of
Common Stock held, as of August 1, 1997, by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
AUGUST 1, 1997 AUGUST 1, 1997(1)
----------------------- -----------------------
NOT NOT
NAME EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
James P. Norris................. -- 28,000 -- $305,760
J. Patrick Millinor, Jr......... -- 50,000 -- 546,000
Donald L. Luke.................. -- 14,000 -- 152,880
James D. Jennings............... -- -- -- --
Timothy Johnston................ -- -- -- --
W. Michael Callahan............. -- -- -- --
Alfred R. Roach, Jr............. -- -- -- --
</TABLE>
- --------
(1) Based on the mid-point of the range of estimated initial public offering
prices set forth on the cover of this Prospectus.
56
<PAGE>
EMPLOYMENT AGREEMENTS
In 1997, Mr. Norris entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on June 1, 2000. In the event of Mr. Norris' death, the agreement will
terminate. In the event of Mr. Norris' disability, the Company will continue
payment of compensation during the first 12 month period of such disability to
the extent not covered by the Company's disability insurance policies. In the
event his employment is terminated, Mr. Norris will receive compensation for
the periods described in the agreement. In addition, Mr. Norris has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1996, Mr. Millinor entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
of up to 100% of Mr. Millinor's annual base salary depending on the actual
annual performance of the Company. The agreement expires on October 24, 1999.
In the event of Mr. Millinor's death, the agreement will terminate. In the
event of Mr. Millinor's disability, the Company will continue payment of
compensation during the first 12 month period of such disability to the extent
not covered by the Company's disability insurance policies. In the event his
employment is terminated, Mr. Millinor will receive compensation for the
periods described in the agreement. In addition, Mr. Millinor has agreed not
to compete with the Company during the six-month period following his
termination of employment.
In 1997, Mr. Luke entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on August 1, 2000. In the event of Mr. Luke's death, the agreement
will terminate. In the event of Mr. Luke's disability, the Company will
continue payment of compensation during the first 12 month period of such
disability to the extent not covered by the Company's disability insurance
policies. In the event his employment is terminated, Mr. Luke will receive
compensation for the periods described in the agreement. In addition, Mr. Luke
has agreed not to compete with the Company during the six-month period
following his termination of employment.
In 1997, Mr. Jennings entered into an employment agreement with Airtron
which provides for an annual base salary of $150,000. Mr. Jennings also
participates in the Airtron incentive bonus plan (which provides him an award
equal to 3.55% of Airtron's EBITDA before corporate bonus not to exceed
$366,000 annually). The agreement expires on April 30, 2000. In the event of
Mr. Jennings' death, the agreement will terminate. In the event of Mr.
Jennings' disability, Airtron will continue payment of compensation during the
first six month period of such disability to the extent not covered by
Airtron's disability insurance policies. In the event his employment is
terminated, Mr. Jennings will receive compensation for the periods described
in the agreement. In addition, Mr. Jennings has agreed not to compete with
Airtron until the later to occur of (i) April 30, 2002 or (ii) one year
following his termination of employment.
In 1997, Mr. Johnston entered into an employment agreement with Airtron
which provides for an annual base salary of $150,000. Mr. Johnston also
participates in the Airtron incentive bonus plan (which provides him an award
equal to 1.50% of Airtron's EBITDA before corporate bonus, not to exceed
$154,000 annually). The agreement expires on April 30, 2000. In the event of
Mr. Johnston's death, the agreement will terminate. In the event of Mr.
Johnston's disability, Airtron will continue payment of compensation during
the first six month period of such disability to the extent not covered by
Airtron's disability insurance policies. In the event his employment is
terminated, Mr. Johnston will receive compensation for the periods described
in the agreement. In addition, Mr. Johnston has agreed not to compete with
Airtron until the later to occur of (i) April 30, 2002 or (ii) one year
following his termination of employment.
In 1997, Mr. Callahan entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on August 1, 2000. In the event of Mr. Callahan's death, the agreement
will terminate. In the event of Mr. Callahan's disability, the Company will
continue payment of compensation during
57
<PAGE>
the first 12 month period of such disability to the extent not covered by the
Company's disability insurance policies. In the event his employment is
terminated, Mr. Callahan will receive compensation for the periods described
in the agreement. In addition, Mr. Callahan has agreed not to compete with the
Company during the six-month period following his termination of employment.
In 1997, Mr. Roach entered into an employment agreement with the Company
which provides for an annual base salary of $150,000 and an annual cash bonus
depending on the actual annual performance of the Company. The agreement
expires on August 1, 2000. In the event of Mr. Roach's death, the agreement
will terminate. In the event of Mr. Roach's disability, the Company will
continue payment of compensation during the first 12 month period of such
disability to the extent not covered by the Company's disability insurance
policies. In the event his employment is terminated, Mr. Roach will receive
compensation for the periods described in the agreement. In addition, Mr.
Roach has agreed not to compete with the Company during the six-month period
following his termination of employment.
Each of the foregoing employment agreements, except the employment
agreements applicable to Messrs. Jennings and Johnston, grants the executive
certain rights in the event of a change in control of the Company. Under the
terms of each agreement, the Company must pay the executive an amount equal to
twelve months compensation at the executive's current salary and provide
benefits to the executive for twelve months if the Company terminates the
executive's employment without "cause." In addition, if an executive's
employment terminates within six months after a sale of all or substantially
all of the assets of the Company or a merger, consolidation, liquidation or
reorganization of the Company, the Company shall pay the executive an amount
equal to three times the executive's severance benefits otherwise available
under the employment agreement.
STOCK AWARDS PLAN
The Group Maintenance America Corp. 1997 Stock Awards Plan (the "Stock
Awards Plan") was adopted by the Company's Board of Directors to further
promote and align the interests of Directors, key employees and other persons
providing services to the Company with those of its shareholders. Pursuant to
this plan and a stock option plan for non-management employees, the Company
intends to grant options to purchase up to 1,899,581 shares of Common Stock
upon consummation of the Offering at an exercise price equal to the initial
public offering price.
Purpose. The purpose of the Stock Awards Plan is to promote the long-term
success of the Company and its subsidiaries for the benefit of the Company's
shareholders by encouraging its officers, employees, Directors and consultants
to have meaningful investments in the Company so that, as shareholders
themselves, those individuals will be more likely to represent the views and
interests of other shareholders and by providing incentives to such
individuals for continued services. The Company believes that the possibility
of participation under the Stock Awards Plan will provide this group of
individuals with an incentive to perform more effectively and will assist the
Company and its subsidiaries in attracting and retaining people of outstanding
training, experience and ability.
Term. The Stock Awards Plan will expire on June 30, 2007.
Administration. The Stock Awards Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"), which has exclusive
authority to make all interpretations and determinations affecting the Stock
Awards Plan. The Committee has the power to determine which officers,
employees, Directors and consultants will receive an award, the time or times
when such award will be made, the type of award and the number of shares of
Common Stock to be issued under an award or the value of an award.
Participation. All officers, key employees, Directors and consultants of the
Company and its subsidiaries are eligible to participate in the Stock Awards
Plan, subject to the discretion of the Committee. Participants in the Stock
Awards Plan are also eligible to participate in other incentive plans of the
Company.
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<PAGE>
Shares Available for Awards. The number of shares of Common Stock that may
be issued under the Stock Awards Plan may not exceed 9% of the number of
shares outstanding (determined quarterly), subject to adjustment for corporate
transactions and changes that affect the Company, its shares or share status.
The number of shares of Common Stock that may be issued to employees of the
GroupMAC Companies and companies acquired in the future under the Stock Awards
Plan and the stock option plan for non-management employees will equal 12% of
the number of shares outstanding (determined quarterly), subject to adjustment
for corporate transactions and changes that affect the Company, its shares or
share status. Such shares may consist in whole or in part of authorized and
unissued shares or treasury shares. If an award lapses or is terminated or
settled in cash in lieu of Common Stock, the shares of Common Stock previously
covered by such awards will be available for future awards under the Stock
Awards Plan.
Awards. The Stock Awards Plan permits grants of the following types of
awards: (i) options, including incentive stock options ("ISOs"), non-qualified
stock options, and reload stock options; (ii) stock appreciation rights
("SARs"); (iii) restricted stock; (iv) performance awards; (v) phantom stock
awards; or (vi) any combination thereof. Under the Stock Awards Plan, ISOs,
non-qualified stock options and SARs may not vest in less than six months from
the award date; provided, however, that the Committee may, in its sole
discretion, shorten or terminate restrictions with respect to an award. Upon
the occurrence of a change of control of the Company, all outstanding awards
under the Stock Awards Plan shall immediately vest and become exercisable.
Stock Options. The Stock Awards Plan provides that the option price pursuant
to which Common Stock may be purchased will be determined by the Committee,
provided that the option price of an ISO will not be less than 100% of the
fair market value of a share of Common Stock on the date of grant. The term of
each option will be fixed by the Committee. Payment of the option price may be
made in cash, through the delivery of shares of Common Stock having a fair
market value on the exercise date equal to the option exercise price or such
other method as may be permitted by the Committee.
In conjunction with non-qualified stock options awarded under the Stock
Awards Plan or otherwise, the Committee may award an additional option to
purchase a number of shares of Common Stock as determined by the Committee if
a holder exercises all or part of an original option within five years of the
date of grant of the original option. The additional option is deemed to be
granted upon delivery of payment upon exercise of the original option without
further action by the Committee (a "Reload Option"). Reload Options are
subject to all of the terms and conditions of stock options generally, except
that their term ends upon termination of the stock options with respect to
which they are granted.
Stock Appreciation Rights. The Committee may award SARs either separately as
an additional right (the "Additional Right SAR") or in conjunction with a
stock option as an alternative right (the "Alternative Right SAR"). The
exercise of a stock option granted in conjunction with an Alternative Right
SAR terminates the Alternative Right SAR to the extent of the shares acquired
upon exercise of the award. Conversely, the exercise of an Alternative Right
SAR terminates the associated stock option to the extent of the shares with
respect to which such right is exercised. The exercise of an Additional Right
SAR has no effect on the exercisability of any other award and the exercise of
any other award has no effect on the exercisability of an Additional Right
SAR.
Upon the exercise of an SAR, the participant will receive an amount equal to
the excess of the fair market value of a share of Common Stock on the date the
SAR is exercised over the award price. The award price for SARs will be
determined by the Committee, provided that the award price will not be less
than 100% of the fair market value of a share of Common Stock on the date such
award was made. For purposes of the limitation on the aggregate number of
shares of Common Stock that may be issued under the Stock Awards Plan, only
the number of shares actually issued in connection with the exercise of an SAR
is to be considered.
Restricted Stock. The Committee may make awards of restricted Common Stock
on such terms, conditions and restrictions (which may include, but are not
limited to, continuous employment with the Company, achievement of specific
business objectives, and other measurements of individual, business unit or
Company
59
<PAGE>
performance), as it determines. Such terms and conditions may include the
manner in which such restricted stock is held, the extent to which the holder
of such stock has rights of a shareholder and the circumstances under which
such shares will be forfeited. None of the shares subject to a restricted
stock award may be assigned, transferred, pledged or sold by the participant
until the termination or earlier lapse of restrictions relating thereto.
Performance Awards. The Committee may make awards of performance awards,
which are based on future performance of the officer, employee, Director or
consultant, the Company or any business unit in which he is employed or
providing services to during the performance period. The Committee will
establish the performance measures applicable to such performance prior to the
beginning of the performance period but subject to such later revisions as the
Committee may deem appropriate to reflect significant unforeseen events or
changes.
Phantom Stock. Phantom stock awards are awards of Common Stock or rights to
receive amounts equal to stock appreciation over a specified period of time.
The Committee may make awards of phantom stock on such terms, conditions and
restrictions as it determines. Such terms and conditions may include the
manner in which such phantom stock is held and the circumstances under which
such units will be forfeited. Phantom stock is an award unit having a value
equivalent to the fair market value of one share of Common Stock, the value of
which fluctuates with that of the Common Stock from which such unit derives
its value. Each phantom stock award will have a maximum value established by
the Committee at the time of the award.
Settlement of Awards. At the Committee's discretion, awards may be settled
in cash, shares of Common Stock, other awards, or in combinations thereof. The
Committee may also require or permit participants to defer the issuance or
vesting of shares or the settlement of awards in cash. The Committee may also
provide that deferred settlements include the payment or crediting of interest
on the deferral amounts or the payment or crediting of dividend equivalents on
deferred settlements denominated in shares of Common Stock. The Committee may
determine the manner in which federal, state or local tax withholding
obligations of the Company will be satisfied including, but not limited to,
the reduction in the amount of stock or cash to be delivered or paid to the
participant or reimbursement by the participant in cash or with shares of
Common Stock, at the fair market value on the settlement date.
INCENTIVE BONUS PROGRAM
The Company has implemented a cash bonus program for the key employees of
its subsidiaries under which awards will be determined based upon the
performance of each subsidiary. The size of the bonus pool will be equal to a
defined percentage of the amount by which the subsidiary's after-tax net
operating profit (as defined) less a charge for capital allocated to the
subsidiary exceeds a similar calculation of the previous year's results. A
certain percentage of earned bonuses are carried over to the following year
for retention purposes and to promote long-term goal achievement. Messrs.
Jennings and Johnston participate in such program in 1997. Messrs. Bryant,
Henninger, Kelly and Sigmund will participate in 1998.
RELATED PARTY TRANSACTIONS
Airtron leases its headquarters offices in Dayton, Ohio and its operating
facilities in Cincinnati and Cleveland, Ohio, Indianapolis, Indiana,
Clearwater, Florida, Dallas, Houston and San Antonio, Texas and Wichita,
Kansas from entities controlled by certain former shareholders of Airtron,
including Messrs. Jennings, Johnston, Seifring and Wilkerson. None of these
leases expire prior to 2008. The aggregate annual base rent to be paid under
these leases is approximately $678,500 with annual increases based on the
consumer price index. The Company believes that the terms of such leases are
no less favorable to the Company than could have been negotiated by the
Company with unaffiliated third parties.
In the Company's acquisition of Airtron, Mr. Jennings received $3,729,653,
together with 848,074 shares of Common Stock and 2,711,344 shares of Series A
Preferred Stock and Mr. Johnston received $1,393,474,
60
<PAGE>
together with 330,764 shares of Common Stock and 1,057,473 shares of Series A
Preferred Stock. Also in the Airtron acquisition, Richard M. Siefring, a
holder of more than 5% of the outstanding Common Stock, received $4,345,177,
together with 985,431 shares of Common Stock and 3,150,484 shares of Series A
Preferred Stock, and Dale M. Wilkerson, another holder of more than 5% of the
outstanding Common Stock, received, together with his spouse, $3,244,206,
together with 739,744 shares of Common Stock and 2,365,007 shares of Series A
Preferred Stock. All of such shares of preferred stock will be redeemed at a
redemption price of $1.00 per share out of the net proceeds of the Offering.
In the Company's acquisition of CRPP, each of Messrs. Callahan and Roach
received consideration in the form of 18,400 shares of Common Stock and
230,000 shares of Series H Preferred Stock. In the Company's acquisition of
CRA, each of Messrs. Callahan and Roach received $500,000, together with
250,000 shares of Series H Preferred Stock. All of such shares of preferred
stock will be redeemed at a redemption price of $1.00 per share out of the net
proceeds of the Offering. Each of them may receive additional cash of
$500,000, 25,629 shares of Common Stock and warrants to purchase 257,000
shares of Common Stock at $17.50 per share depending on the occurrence of
certain events.
In the Company's acquisition of K&N, Andrew Jeffrey Kelly, who will become a
Director of the Company, received $1,568,000, together with 403,111 shares of
Common Stock and 1,568,000 shares of Series D Preferred Stock. All of such
shares of preferred stock will be redeemed at a redemption price of $1.00 per
share out of the net proceeds of the Offering. Mr. Kelly may receive
contingent consideration based on the operating results of K&N for the 15
month period ended June 30, 1998. The Company estimates that such payments
will be $640,000. K&N entered into a new five year renewable lease with Sigma
Management, a company owned by Mr. Kelly, to replace the existing lease for
the Company's Arlington, Texas facility. The annual base rent to be paid under
this lease is approximately $94,800. The Company believes that the terms of
such lease are no less favorable to the Company than could have been
negotiated by the Company with unaffiliated third parties.
In the Company's pending acquisition of MacDonald-Miller, Fredric J.
Sigmund, who will become a director of the Company, will receive approximately
$1,752,564 and 187,775 shares of Common Stock. Mr. Sigmund may receive a
portion of the contingent consideration payable to the former shareholders of
MacDonald-Miller based on the operating results of MacDonald-Miller for the 12
month period ended December 31, 1997. The Company estimates that such payments
will be approximately $425,000. MacDonald-Miller will enter into a new ten
year renewable lease with F&V Investments, a company owned by Mr. Sigmund, to
replace the existing lease for MacDonald-Miller's Seattle, Washington
facility. The annual base rent to be paid under this lease is approximately
$475,000. The Company believes that the terms of such lease are no less
favorable to the Company than could have been negotiated by the Company with
unaffiliated third parties.
In the Company's pending acquisition of Masters, Ronald D. Bryant, who will
become a director of the Company, will receive approximately $6,254,000 and
464,921 shares of Common Stock. Additionally, Masters will enter into a new
six year renewable lease with Mr. Bryant to replace the existing lease for
Masters' Gaithersburg, Maryland facility. The annual base rent to be paid
under this lease is approximately $233,700, with annual increases of 4%. The
Company believes that the terms of such lease are no less favorable to the
Company than could have been negotiated by the Company with unaffiliated third
parties.
In the Company's pending acquisition of Van's, David L. Henninger, who will
become a director of the Company, will receive, together with his spouse,
approximately $1,559,125 and 113,033 shares of Common Stock. Additionally,
Van's will enter into a new five-year renewable lease with Mr. Henninger to
replace the existing lease for Van's Delray Beach, Florida facility. The
initial annual base rent to be paid under this lease is approximately $69,000
with annual increases of 3%. The Company believes that the terms of such lease
are no less favorable to the Company than could have been negotiated by the
Company with unaffiliated third parties.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Prospectus, certain
information known by the Company with respect to the ownership of shares of
Common Stock as to (i) all persons who are expected to be the beneficial
owners of 5% or more of the outstanding shares of Common Stock upon
consummation of the Offering, (ii) each director and each person who has
consented to be named as a director (the "named directors"), (iii) each Named
Executive Officer, and (iv) all executive officers and directors of the
Company as a group. Unless otherwise indicated, each of the following persons
may be deemed to have sole voting and dispositive power with respect to such
shares. Information set forth in the table with respect to beneficial
ownership of the Common Stock has been provided to the Company by such
holders. Unless otherwise indicated, each person's address is c/o the
Company's principal executive offices at 8 Greenway Plaza, Suite 1500,
Houston, Texas 77046.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND OUTSTANDING
NATURE OF COMMON STOCK
BENEFICIAL -----------------
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP OF BEFORE AFTER
OWNER COMMON STOCK(1) OFFERING OFFERING
- ------------------------------ --------------- -------- --------
<S> <C> <C> <C>
James P. Norris.................... -- -- --
J. Patrick Millinor, Jr............ 236,812(2) 2.5% 1.2%
Donald L. Luke..................... -- -- --
Chester J. Jachimiec............... 147,333(3) 1.6% *
Richard S. Rouse................... 125,933(4) 1.3% *
William Michael Callahan........... 18,400(5) * *
Alfred R. Roach, Jr................ 18,400(5) * *
John M. Sullivan................... 112,050(6) 1.2% *
James D. Weaver.................... 86,500 * *
James D. Jennings.................. 653,872(7) 6.9% 3.3%
Timothy Johnston................... 330,764(7) 3.5% 1.7%
Ronald D. Bryant................... 464,921(8) -- 2.3%
David L. Henninger................. 113,033(8) -- *
Andrew Jeffrey Kelly............... 403,111 4.2% 2.0%
Thomas B. McDade................... -- -- --
Lucian Morrison.................... 2,000 * *
Fredric Sigmund.................... 187,775(8)(9) -- *
National City Bank Dayton, as
Trustee of the Airtron, Inc.
Savings and Profit Sharing Plan... 639,074 6.7% 3.2%
c/o Mr. David Smeltzer
6 North Main Street
Dayton, Ohio 45412
Richard M. Siefring................ 985,431 10.4% 4.9%
7813 N. Dixie Drive
Dayton, Ohio 45414
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND OUTSTANDING
NATURE OF COMMON STOCK
BENEFICIAL -----------------
OWNERSHIP OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK(1) OFFERING OFFERING
- ------------------------------------ --------------- -------- --------
<S> <C> <C> <C>
Dale M. Wilkerson............................ 527,969(9) 5.6% 2.6%
7813 N. Dixie Drive
Dayton, Ohio 45414
Gordon A. Cain............................... 2,417,950 25.5% 12.1%
Eight Greenway Plaza, Suite 702
Houston, Texas 77046
All executive officers and named directors of
the Company as a group (19 persons)......... 2,982,904 31.1% 14.9%
</TABLE>
- --------
* Beneficially owns less than 1% of the outstanding shares of Common Stock.
(1) The numbers shown do not include an aggregate of 217,600 options or
warrants to purchase Common Stock held by such individuals which are not
exercisable within 60 days.
(2) Includes 16,667 shares subject to options exercisable on December 31,
1997.
(3) Includes 16,000 shares held in each of the Paula Ann Jachimiec Trust and
the Sarah Elizabeth Jachimiec Trust of which Mr. Jachimiec is trustee. Mr.
Jachimiec disclaims beneficial ownership of such shares. Includes 15,333
shares subject to options exercisable on December 31, 1997.
(4) Includes 13,333 shares subject to options exercisable on December 31,
1997.
(5) Does not include warrants to purchase 257,000 shares of Common Stock at
$17.50 per share and 25,629 shares that may be issued upon the occurrence
of certain events. See "Related Party Transactions."
(6) Includes 82,050 shares for which Mr. Sullivan has a limited power of
attorney to vote and exercise investment powers until revoked by the
actual owners.
(7) Includes shares held in employee benefit plans (Jennings--195,728 shares;
Johnston--285,334 shares; and Wilkerson--383,484 shares).
(8) All such shares will be issued upon completion of the Offering.
(9) Includes shares held by the MacDonald-Miller Industries, Inc. Employee
Stock Ownership Plan and Trust.
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THE ACQUISITIONS
The Company entered into exchange agreements with shareholders of the Pre-
Offering Companies (other than Jarrell) and merger agreements with the
shareholders of Jarrell and the Offering Acquisition Companies. With respect
to the Pre-Offering Companies, the Company paid, and with respect to the
Offering Acquisition Companies the Company will pay, an agreed value for all
the issued and outstanding capital stock of each GroupMAC Company based
generally on the Company's evaluation of the operating results and
capitalization of such company. In some cases, the shareholders of a company
have the opportunity to receive additional amounts of purchase price
contingent upon the occurrence of future events. Shareholders of several Pre-
Offering Companies also received preferred stock which will be redeemed for
cash (at a redemption price equal to $1.00 per share) with a portion of the
proceeds of the Offering.
The following table sets forth for each GroupMAC Company, as of the date of
its acquisition, the consideration paid or to be paid to its shareholders (i)
in cash, (ii) in Common Stock, (iii) in preferred stock and (iv) in assumed
debt.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON PREFERRED ASSUMED
CASH(1)(4) STOCK(1)(4) STOCK(1)(5) DEBT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRE-OFFERING COMPANIES:
Airtron..................... $20,848,637 4,652,140 14,873,131 $ 1,289,927
A-ABC/A-1................... 1,886,000 359,302 -- 947,937
Charlie's................... 1,502,502 157,256 -- 112,741
CRPP(2)..................... 450,000 192,123 550,000(2) 78,236
CRA (asset purchase)(2)..... 2,000,000 -- 500,000 --
Costner(2)(3)............... 501,290 65,536 100,000 193,755
Hallmark.................... 2,080,794 105,687 580,000 338,398
Jarrell..................... 150,000 12,698 -- 26,654
K&N(2)...................... 1,568,000 403,111 1,568,000 1,498,995
Sibley(2)................... 1,201,873 62,001 664,691 376,368
USA (asset purchase)........ 435,779 49,804 435,771 100,000
Way Residential (asset
purchase)(2)(3)............ 16,500 6,428 -- --
----------- --------- ---------- -----------
32,641,375 6,066,086 19,271,593 4,963,011
----------- --------- ---------- -----------
OFFERING ACQUISITION
COMPANIES:(3)
All Service................. 2,311,570 201,804 -- 8,830
Arkansas Mechanical......... 2,121,000 151,500 -- 692,997
Central Carolina............ 3,637,952 281,508 -- 979
Evans....................... 1,167,391 101,915 -- --
Linford(2).................. 651,000 126,037 -- 114,000
MacDonald-Miller(2)......... 6,001,931 643,064 -- 5,624,398
Masters..................... 6,605,457 491,076 -- 1,834,709
Mechanical.................. 109,000 7,786 -- --
Paul E. Smith............... -- 217,062 -- 325,000
Southeast Mechanical........ 2,149,000 153,571 -- 355,980
Van's....................... 1,559,125 113,034 -- 340,000
Willis...................... 2,257,000 241,786 -- 220,731
Yale........................ 2,215,000 158,214 -- 420,045
----------- --------- ---------- -----------
30,785,426 2,888,357 -- 9,937,669
----------- --------- ---------- -----------
S Corporation Distribu-
tions(4)................... (1,856,250) (119,554) -- --
----------- --------- ---------- -----------
Total................... $61,570,551 8,834,889 19,271,593 $14,900,680
=========== ========= ========== ===========
</TABLE>
- --------
(1) Subject to post-closing adjustments.
(2) The former shareholders of these GroupMac Companies may receive additional
consideration in the form of cash, Common Stock or warrants for Common
Stock based on the occurance of future events.
(3) The shares of Common Stock to be issued is based on the midpoint of the
range of initial public offering prices reflected on the cover page of
this Prospectus.
(4) The cash and Common Stock consideration is presented before anticipated
Subchapter S distributions.
(5) Includes 1,713,622 warrants for preferred stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Under the Company's Articles of Incorporation, as amended (the "Articles"),
the Company has authority to issue 150,000,000 shares of capital stock,
consisting of 50,000,000 shares of Preferred Stock, par value $0.001 per share
(the "Preferred Stock"), and 100,000,000 shares of Common Stock, par value
$0.001 per share. As of the date of this Prospectus, the Company had
outstanding 9,486,395 shares of Common Stock and 17,007,971 shares of
Preferred Stock (13,159,509 shares of Series A Preferred Stock, 100,000 shares
of Series C Preferred Stock, 1,568,000 shares of Series D Preferred Stock,
580,000 shares of Series E Preferred Stock, 664,691 shares of Series F
Preferred Stock, 435,771 shares of Series G Preferred Stock and 500,000 shares
of Series H Preferred Stock). All of the outstanding Preferred Stock and
warrants for 1,713,622 shares of Series A Preferred Stock will be redeemed at
a price of $1.00 per share out of the net proceeds of the Offering. When so
redeemed, all such shares of Preferred Stock will be authorized and subject to
reissuance by the Company.
The following summary description of the material features of the capital
stock of the Company is intended as a summary only and is qualified in its
entirety by reference to the Articles, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Articles authorize the issuance of Preferred Stock in one or more series
having designations, rights and preferences determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without approval of holders of Common Stock, to issue Preferred Stock with
dividends, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present
intention to issue any additional shares of its Preferred Stock, there can be
no assurance that it will not do so in the future.
COMMON STOCK
Voting Rights. Holders of Common Stock are entitled to one vote for each
share on all matters on which shareholders generally are entitled to vote,
including elections of directors. Upon consummation of the Offering, the Board
of Directors will be classified into three classes of five directors, with the
term of each class expiring on a staggered basis. The classification of the
Board of Directors may make it more difficult to change the composition of the
Board of Directors and thereby may discourage or make more difficult an
attempt by a person or group to obtain control of the Company. The Articles do
not provide for cumulative voting for the election of directors. Holders of
Common Stock have no preemptive, subscription, redemption or conversion
rights.
Dividends. Subject to the preferential rights of any outstanding Preferred
Stock that may be created by the Board of Directors under the Articles,
dividends may be paid to holders of Common Stock when, as and if declared by
the Board of Directors out of funds legally available for such purpose. The
declaration and payment of dividends on Common Stock could be restricted by
the terms of any Preferred Stock issued. Under the TBCA, dividends may be paid
by the Company out of "surplus" (as defined under Article 1.02 of the TBCA)
or, if there is no surplus, out of net profits for the fiscal year in which
the dividends are declared and/or the preceding fiscal year. On a pro forma
basis, at June 30, 1997, the Company had surplus of approximately $21 million
(on a book value basis) for the payment of dividends, and the Company will
also be able to pay dividends out of any net profits for the current and/or
prior fiscal year, if any. However, the Company does not intend to pay
dividends at the present time. See "Dividend Policy" and "Description of Bank
Credit Agreement."
Liquidation. In the event of the dissolution or winding up of the Company,
after payment or provision for payment of debts and other liabilities of the
Company and any other series or class of the Company's stock hereafter issued
that ranks senior as to liquidation rights to the Common Stock, the holders of
Common Stock
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will be entitled to receive pro rata all remaining assets of the Company
available to such holders. All outstanding shares of Common Stock are, and the
shares of Common Stock to be sold by the Company in this Offering will be,
duly and validly issued, fully paid and nonassessable.
Miscellaneous. There is no established public trading market for the Common
Stock. The Common Stock has been approved for listing on the New York Stock
Exchange.
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Article 13 of the TBCA ("Article 13") which, with
certain exceptions, prohibits a Texas corporation from engaging in a "business
combination" (as defined in Article 13) with any shareholder who is a
beneficial owner of 20% or more of the corporation's outstanding stock for a
period of three years after such shareholder's acquisition of a 20% ownership,
unless: (i) the board of directors of the corporation approves the transaction
or the shareholder's acquisition of shares prior to the acquisition or (ii)
two-thirds of the unaffiliated shareholders of the corporation approve the
transaction at a shareholders' meeting. Shares that are issuable, but have not
yet been issued, pursuant to options, conversion or exchange rights or other
agreements are not considered outstanding for purposes of Article 13.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles contain a "fair price" provision which generally requires that
certain mergers, business combinations and similar transactions constituting a
"Business Combination" with an "Interested Shareholder" (generally the
beneficial owner of at least 10 percent of the Company's voting stock) be
approved by the holders of at least 80 percent of the Company's voting stock,
unless (i) the transaction is approved by at least 80 percent of the
"Continuing Directors" of the Company, who constitute a majority of the entire
board or (ii) certain "fair price" and procedural requirements are satisfied.
The Articles define "Business Combination" as (i) any merger or consolidation
involving the Company or a subsidiary of the Company, (ii) any sale, lease,
exchange, transfer or other disposition (in one transaction or a series of
transactions), including without limitation a mortgage or any other security
device, of all or any substantial part of the assets either of the Company or
of a subsidiary of the Company to or with any Interested Shareholder, (iii)
the issuance, sale, exchange, transfer or other disposition by the Company or
a subsidiary of the Company of any securities of the Company or any subsidiary
of the Company to or with any Interested Shareholder, (iv) any
recapitalization or reclassification of the Company's securities (including
without limitation, any reverse stock split) or other transaction that would
have the effect of increasing the voting power of an Interested Shareholder,
(v) any liquidation, spinoff, splitoff, splitup or dissolution of the Company
proposed by or on behalf of any Interested Shareholder, and (vi) any
agreement, contract or other arrangement providing for any of the transactions
described in this definition of Business Combination. "Continuing Director" is
defined to mean a director who either was a member of the Board of Directors
of the Company prior to the time such Interested Shareholder became an
Interested Shareholder or who subsequently became a director of the Company
and whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least 80 percent of the Continuing Directors then
on the Board of Directors, either by a specific vote or by approval of the
proxy statement issued by the Company on behalf of the Board of Directors in
which such person is named as nominee for director, without an objection to
such nomination; provided, however, that in no event shall a director be
considered a "Continuing Director" if such director is an Interested
Shareholder and the Business Combination to be voted upon is with such
Interested Shareholder or is one in which such Interested Shareholder
otherwise has an interest (except proportionately as a shareholder of the
Company).
In accordance with the Company's Bylaws, a shareholder of the Company may
nominate persons for election to the Board of the Company if the shareholder
submits such nomination, together with certain related information required by
the Company's Bylaws, in writing to the Secretary of the Company not less than
50 days nor more than 75 days prior to the date of any annual meeting of
shareholders.
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DESCRIPTION OF BANK CREDIT AGREEMENT
GENERAL
In connection with this Offering, the Company expects to enter into a credit
agreement (the "Bank Credit Agreement") with lenders (the "Lenders") and Texas
Commerce Bank National Association, as Agent (the "Agent"). The Agent has
committed to provide, or arrange for a syndicate of Lenders to provide, the
Company, subject to certain terms and conditions, the entire $75 million
principal amount of the revolving credit facility described below. The
following description summarizes the material provisions the Company currently
expects will be included in the Bank Credit Agreement. The following
description does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the provisions of the Bank Credit
Agreement, which have yet to be fully negotiated.
AMORTIZATION; PREPAYMENTS
Loans under the Bank Credit Agreement may be prepaid at any time without
premium or penalty in reasonable minimum amounts. Prepayments of Eurodollar
borrowings on any day other than the last day of an interest period will be
required to be accompanied by a payment to the Lenders of various costs,
expenses or losses, if any, incurred as a result of such prepayment. The
amount available under the Bank Credit Agreement will be payable in full on
its maturity date.
SECURITY; GUARANTEES
Borrowings under the Bank Credit Agreement will be guaranteed by the
Company's Material Subsidiaries (as defined in the Bank Credit Agreement),
including future Material Subsidiaries. The obligations of the Company under
the Bank Credit Agreement and the obligations under the guarantees will be
secured by a first priority lien on the accounts receivable and inventory of
the Company and its Material Subsidiaries, including any future subsidiaries,
and by a pledge of stock of its domestic subsidiaries.
INTEREST RATES
Loans under the Bank Credit Agreement will bear interest at a rate per annum
at the Company's option, of either (i) the Alternate Base Rate (which is equal
to the greater of the Federal Funds Effective Rate (as defined in the Bank
Credit Agreement) plus .5% or the Prime Rate (as defined in the Bank Credit
Agreement) plus a margin depending on the ratio of indebtedness for borrowed
money to Adjusted EBITDA (as defined in the Bank Credit Agreement), or (ii)
the Eurodollar Rate (as defined in the Bank Credit Agreement) plus a margin,
depending on the ratio of indebtedness for borrowed money to Adjusted EBITDA.
FEES, EXPENSES AND COSTS; CREDIT FACILITIES
The terms of the Bank Credit Agreement will require the Company to pay the
following fees in connection with the maintenance of loans under the Bank
Credit Agreement: (i) commitment fees to be paid to the Lenders in amounts
between .25% and .375% per annum with respect to the unused commitments under
the Bank Credit Agreement depending on the ratio of indebtedness for borrowed
money to Adjusted EBITDA, payable quarterly in arrears until such time as such
facility is terminated; and (ii) administration fees payable annually to the
Agent. In addition, the Company will pay various underwriting and arrangement
fees and closing costs in connection with the origination and syndication of
the Bank Credit Agreement.
The Company will also be required to reimburse the Agent for all reasonable
out-of-pocket costs and expenses incurred in the preparation, documentation
and administration of the Bank Credit Agreement and to reimburse the Lenders
for all reasonable costs and expenses incurred in connection with the
enforcement of their rights in connection with a default or the enforcement of
the Bank Credit Agreement. The Company will
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indemnify the Agent and the Lenders and their respective officers, directors,
shareholders, employees, agents and attorneys against certain costs, expenses
(including fees and reimbursements of counsel) and liabilities arising out of
or relating to the Bank Credit Agreement and the transactions contemplated
thereby. The Lenders also will be entitled to be reimbursed for certain
reserve requirements and increases therein, changes in law and circumstances,
taxes (other than an overall net income), capital adequacy, and consequential
costs. Further, the inability to determine Eurodollar Rates or the possible
future illegality of the Eurodollar Rate option will result in such rate
option being unavailable.
COVENANTS
The Bank Credit Agreement will contain substantial restrictive covenants
limiting the ability of the Company and its subsidiaries to: (i) incur
Indebtedness (as defined in the Bank Credit Agreement), including contractual
contingent obligations; (ii) pay certain debt after default; (iii) create or
allow to exist liens or other encumbrances; (iv) transfer assets except for
sales and other transfers of inventory or surplus, immaterial or obsolete
assets in the ordinary course of business; (v) enter into mergers,
consolidations and asset dispositions of all or substantially all of its
properties; (vi) make investments; (vii) extend credit to any entity; (viii)
sell, transfer or otherwise dispose of any class of stock or the voting rights
of any subsidiary of the Company; (ix) enter into transactions with related
parties other than on an arm's-length basis on terms no less favorable to the
Company than those available from third parties; (x) amend certain agreements;
(xi) make any material change in the nature of the business conducted by the
Company; (xii) pay dividends or redeem shares of capital stock; and (xiii)
make capital expenditures.
In addition, the Bank Credit Agreement will contain covenants that, among
other things and with certain exceptions, will require the Company and its
subsidiaries to: (i) maintain the existence, qualification and good standing
of the Company and its subsidiaries; (ii) comply in all material respects with
all material applicable laws; (iii) maintain material properties, rights and
franchises; (iv) deliver certain financial and other information; (v) maintain
specified insurance; (vi) pay taxes; and (vii) notify the Lenders of any
default under the Loan Documents (as defined in the Bank Credit Agreement) and
of certain other material events.
Under the Bank Credit Agreement, the Company will be required to satisfy
certain financial covenants and tests, including (i) a fixed charge coverage
ratio of not less than 1.20 to 1.0; (ii) a minimum tangible net worth that is
positive; (iii) a ratio of total indebtedness for borrowed money to
Capitalization (as defined in the Bank Credit Agreement) of not greater than
55%; and (iv) a minimum Consolidated Net Worth (as defined in the Bank Credit
Agreement) equal to the net worth at the closing date of the Facility less
$750,000 plus 100% of the net proceeds of any equity issued plus 75% of
cumulative net income after the closing date. Changes in generally accepted
accounting principles that materially affect financial covenants may result in
modifications to the financial covenants with the view to placing the
covenants on the same economic basis as before the change in generally
accepted accounting principles.
EVENTS OF DEFAULT
Events of Default under the Bank Credit Agreement will include, subject to
certain applicable notice and grace periods, the following: (i) a default in
the payment when due of any principal, interest, fees or other amount under
the Bank Credit Agreement; (ii) a default by the Company under any debt
instrument in excess of $500,000, or the occurrence of any event or condition
that enables the holder of such debt to accelerate the maturity thereof; (iii)
any material breach of any representation, warranty or statement in, or
failure to perform any duty or covenant under the Bank Credit Agreement or any
of the Loan Documents; (iv) commencement of voluntary or involuntary
bankruptcy, insolvency or similar proceedings by or against the Company or any
Material Subsidiary; (v) any judgment or order in excess of $500,000 net of
confirmed insurance remaining undischarged or unstayed for longer than certain
periods; and (vi) a Change of Control (as defined in the Bank Credit
Agreement).
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
19,962,527 shares of Common Stock (21,087,527 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 7,500,000
shares (8,625,000 shares if the Underwriters' over-allotment option is
exercised in full) sold in the Offering will be freely tradable in the public
market without restriction or limitation under the Securities Act, except for
any shares held by an "affiliate" (as defined in the Securities Act) of the
Company. The 9,486,396 shares of Common Stock held by existing shareholders of
the Company immediately prior to the Offering and the 2,976,130 shares of
Common Stock to be issued in connection with the acquisition of the Offering
Acquisition Companies, Costner, Way Residential and Callahan Roach, will be
"restricted securities" within the meaning of Rule 144, except for the 643,064
shares of Common Stock registered under the Securities Act in connection with
the acquisition of MacDonald-Miller.
In addition, certain of the Company's directors, executive officers and
principal shareholders, who hold an aggregate of 3,046,686 shares of Common
Stock, have entered into lock-up agreements with the Representatives of the
Underwriters. These persons have agreed not to offer, sell, contract to sell,
grant any option with respect to, pledge, hypothecate or otherwise dispose of,
any shares of Common Stock owned by them until the date occurring 180 days
after the date of this Prospectus without the prior written consent of The
Robinson-Humphrey Company, LLC. All such 3,046,686 shares will become
available for sale 180 days after the date of this Prospectus upon expiration
of these lock-up agreements, subject to compliance with Rule 144 promulgated
under the Securities Act. Furthermore, the former shareholders of the Pre-
Offering Companies and the shareholders of the Offering Acquisition Companies,
who collectively will hold 8,834,889 shares of Common Stock, have entered or
will enter into Stock Transfer Restriction Agreements that impose restrictions
of the transferability of their shares. See "--Transfer Restrictions."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for a
least one year, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock that does not exceed the greater of (i) one percent of the number of the
then outstanding shares or (ii) the average weekly reported trading volume of
the Common Stock during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain notice requirements and to the
availability of current public information about the Company and must be made
in unsolicited brokers' transactions or to a market maker. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company
under the Securities Act during the three months preceding a sale and who has
beneficially owned such shares for at least two years is entitled to sell such
shares under Rule 144(k) without regard to the information, volume, manner of
sale and notice provisions of such Rule. At the date of this Prospectus,
1,211,200 "restricted" shares of Common Stock are eligible for resale pursuant
to Rule 144, subject to the volume, manner of sale and other limitations
thereof. The remaining "restricted" shares will become eligible for resale
pursuant to Rule 144 from time to time thereafter.
On the date of this Prospectus, the Company had outstanding options to
purchase 378,800 shares of Common Stock, 100,533 of which will be vested.
Options to purchase 10,000 shares of Common Stock have been exercised and
options to purchase at least an additional 1,899,581 shares of Common Stock
will be granted concurrently with the closing of the Offering. The Company
expects to file a registration statement on Form S-8 under the Securities Act
to register the shares of Common Stock issuable upon exercise of options
granted under the Stock Awards Plan and the stock option plan for
nonmanagement employees. Accordingly, such shares will be freely tradeable by
holders who are not affiliates of the Company and, subject to the volume and
manner of sale limitations of Rule 144, by holders who are affiliates of the
Company.
Prior to this Offering, there has been no active trading market for the
Common Stock. No predictions can be made of the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale
will have on the market price prevailing from time to time. Nevertheless,
sales of significant amounts of Common Stock could adversely affect the
prevailing market price of Common Stock, as well as impair the ability of the
Company to raise capital through the issuance of additional equity securities.
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TRANSFER RESTRICTIONS
Purchasers of Common Stock in the acquisitions of the Pre-Offering Companies
were, and Common Stock in the acquisitions of the Offering Acquisition
Companies will be, required to enter into a Stock Transfer Restriction
Agreement.
The Stock Transfer Restriction Agreements are substantially similar and
generally require that, at any time that the Company is engaged in an
underwritten public offering of its securities, each shareholder who is a
party thereto shall refrain from making any disposition of Common Stock on a
securities exchange or in the over-the-counter or any other public trading
market for the period of time requested by the Company; provided, however,
that (i) the restrictions on the transfer of Common Stock shall not limit any
shareholder's right to sell Common Stock pursuant to any piggyback
registration right that such shareholder may have pursuant to any registration
rights or similar agreement binding upon the Company and (ii) such
restrictions are no more restrictive than those imposed on the management of
the Company. Additionally, each Stock Transfer Restriction Agreement provides
that, during the one-year period following the date of such agreement (the
"First Holding Period"), the shareholder will not dispose of his or her shares
of Common Stock (subject to certain limited exceptions generally involving
transfers to family members and trusts or pursuant to an effective
registration statement). In addition to the foregoing restrictions, during the
one year period following the First Holding Period (the "Second Holding
Period"), no shareholder who is a party thereto may dispose of any Common
Stock in any calendar month in an amount greater than 3% of the number of
shares of Common Stock issued to such shareholder increasing cumulatively for
months in which less than 3% was sold. After expiration of the Second Holding
Period, all such restrictions under the Stock Transfer Restriction Agreements
lapse. Finally, any shareholder who is a party thereto shall provide five
business days' notice to the Company prior to any proposed disposition until
the later of (i) the end of the one-year period following the Second Holding
Period, (ii) for as long as such shareholder is an officer or director of the
Company or any of its Pre-Offering Companies or (iii) the date on which such
shareholder ceases to hold the greater of 20,000 shares of Common Stock or 20%
of the number of shares.
No shareholder who is a party thereto shall make a transfer of any Common
Stock if such action would constitute (i) a violation of any federal or state
securities law, (ii) a breach of any condition to any exemption from
registration of the Common Stock under any such laws or (iii) a breach of any
undertaking or agreement of such shareholder entered into pursuant to such
laws or in connection with obtaining an exemption thereunder.
The summary herein of certain provisions of the Stock Transfer Restriction
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions thereof, the form of
which is filed as an exhibit to the Registration Statement.
REGISTRATION RIGHTS
Pursuant to several Registration Rights Agreements, as amended (the
"Registration Rights Agreements"), the Company has agreed to register under
the Securities Act substantially all of the shares of Common Stock outstanding
on the date of this Prospectus (9,486,395 shares) and will enter into similar
agreements with the shareholders of the Offering Acquisition Companies (except
MacDonald-Miller), Costner, Way Residential and Callahan Roach (who will
receive 2,976,130 shares of Common Stock). Pursuant to the Registration Rights
Agreements, the shareholders who are parties thereto will be entitled, subject
to certain limitations, to include their shares of Common Stock in a
registration of shares of Common Stock subsequent to this Offering which is
initiated by the Company under the Securities Act. The Registration Rights
Agreement with respect to the founding shareholders of the Company
additionally provides that any one or more shareholders holding a minimum
number of shares of Common Stock has the right to require the Company to
effect a registration of all or any part of the shares of Common Stock under
the Securities Act (a "Demand Registration"). In the event the aggregate
number of shares of Common Stock which the shareholders request the Company to
include in any registration, together, in the case of a registration initiated
by the Company, with the shares of Common Stock of the Company to be included
in such registration, exceeds the number that in the opinion of the managing
underwriter can be sold in such offering without materially affecting the
offering price of such shares, the number of shares of each
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shareholder to be included in such registration will be reduced pro rata based
on the aggregate number of shares for which registration was requested.
The Company at its option, may delay the filing of a registration statement
required pursuant to any Demand Registration for up to 120 days if it has
determined that filing a registration statement would be seriously detrimental
to the Company or its shareholders or that a delay in filing the registration
statement is necessary in light of a pending corporate development. In
addition, although the Company's founding shareholders have the right to have
the shares of Common Stock owned by them registered by the Company under the
Securities Act as described below, each of them has agreed not to exercise
their respective demand rights for the two year period following the Offering
except for Mr. Cain who has agreed to not exercise his demand rights for one
year.
The Registration Rights Agreements contain customary provisions whereby the
Company and the shareholders party thereto agree to indemnify and contribute
to the other with regard to losses caused by the misstatement of any
information or the omission of any information required to be provided in a
registration statement filed under the Securities Act. The Registration Rights
Agreements require the Company to pay the expenses associated with any
registration other than sales discounts, commissions, transfer taxes and
amounts to be borne by underwriters or as otherwise required by law.
The summary herein of certain provisions of the Registration Rights
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all of the provisions of the forms of
Registration Rights Agreements, copies of which are filed as exhibits to the
Registration Statement.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and the underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters, for whom The Robinson-Humphrey
Company, LLC, William Blair & Company, L.L.C. and ABN AMRO Chicago Corporation
are acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company the number of shares of Common Stock set forth below
opposite their respective names. The Underwriters are committed to purchase
all of such shares if any are purchased. Under certain circumstances, the
commitments of non-defaulting Underwriters may be increased as set forth in
the Underwriting Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
The Robinson-Humphrey Company, LLC.............................. 1,608,334
William Blair & Company, L.L.C.................................. 1,608,333
ABN AMRO Chicago Corporation.................................... 1,608,333
BancAmerica Robertson Stephens.................................. 125,000
Bear, Stearns & Co. Inc. ....................................... 125,000
CIBC Oppenheimer Corp........................................... 125,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 125,000
A.G. Edwards & Sons, Inc........................................ 125,000
Goldman, Sachs & Co............................................. 125,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 125,000
Morgan Stanley & Co. Incorporated............................... 125,000
NationsBanc Montgomery Securities, Inc.......................... 125,000
PaineWebber Incorporated........................................ 125,000
Schroder & Co. Inc. ............................................ 125,000
J.C. Bradford & Co.............................................. 65,000
Equitable Securities Corporation................................ 65,000
First Southwest Company......................................... 65,000
Furman Selz LLC................................................. 65,000
Harris Webb & Garrison, Inc..................................... 65,000
Interstate/Johnson Lane Corporation............................. 65,000
Jefferies & Company, Inc........................................ 65,000
C.L. King & Associates, Inc..................................... 65,000
Ladenburg Thalmann & Co. Inc.................................... 65,000
McDonald & Company Securities, Inc.............................. 65,000
Morgan Keegan & Company, Inc.................................... 65,000
The Ohio Company................................................ 65,000
Pennsylvania Merchant Group Ltd................................. 65,000
Principal Financial Securities, Inc............................. 65,000
Rauscher Pierce Refsnes, Inc.................................... 65,000
Raymond James & Associates, Inc................................. 65,000
Sanders Morris Mundy............................................ 65,000
Scott & Stringfellow, Inc....................................... 65,000
The Seidler Companies Incorporated.............................. 65,000
Wheat, First Securities, Inc.................................... 65,000
---------
Total......................................................... 7,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $0.55 per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted the Underwriters an option, exercisable by the
Representatives, to purchase up to 1,125,000 additional shares of Common Stock
at the initial public offering price less the underwriting discount. Such
option, which expires 30 days after the date of this Prospectus, may be
exercised solely to cover over-
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allotments. To the extent the Representatives exercise such option, each of
the Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of the option shares as the number of shares
to be purchased initially by that Underwriter bears to the total number of
shares to be purchased initially by the Underwriters.
Prior to this Offering, there has been no established trading market for the
Common Stock. The initial price to the public for the Common Stock offered
hereby was determined by negotiations among the Company and the
Representatives. Among the factors considered in determining the initial price
to the public were the history of and the prospects for the industry in which
the Company competes, the past and present operations of the Company and the
historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of the Offering, and the recent market prices of securities of
generally comparable companies. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offering at or above the initial
public offering price.
ABN AMRO Bank, N.V., an affiliate of ABN AMRO Chicago Corporation, will make
loans to the Company under the Bank Credit Agreement, and such affiliate will
receive a portion of the proceeds from this Offering pursuant to the repayment
of loans under the Original Credit Agreement. See "Use of Proceeds."
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when
shares of Common Stock originally sold by such syndicate member are purchased
in a syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
New York Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.
In connection with the Offering, the Company's officers and directors and
certain of its shareholders have agreed that, during a period of 180 days from
the date of this Prospectus, such holders will not, without the prior written
consent of The Robinson-Humphrey Company, LLC, directly or indirectly, offer,
sell, contract to sell, grant any option with respect to, pledge, hypothecate
or otherwise dispose of, any shares of Common Stock except for a cashless
exercise of stock options or a bona fide gift provided that the donee agrees
to be bound by the terms of the donor's lockup agreement. In addition, the
Company has agreed that, during a period of 180 days from the date of this
Prospectus, the Company will not, without the prior written consent of The
Robinson-Humphrey Company, LLC, directly or indirectly, offer, sell, contract
to sell, grant any option with respect to, pledge, hypothecate or otherwise
dispose of any shares of Common Stock except for shares of Common Stock to be
issued in the Offering, in connection with acquisitions generally, and upon
the exercise of stock options which are either (i) outstanding on the date of
this Prospectus, (ii) issued under the Company's 1997 Stock Awards Plan or
(iii) issued under the Company's stock option plan for non-management
employees.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas, and for the
Underwriters by King & Spalding, Atlanta, Georgia. King & Spalding will rely
upon the opinion of Bracewell & Patterson, L.L.P. as to all matters of Texas
law.
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EXPERTS
The financial statements of Group Maintenance America Corp. (GroupMAC
Parent), Group Maintenance America Corp. and Subsidiaries (formerly Airtron,
Inc.), K&N Plumbing, Heating and Air Conditioning, Inc., A-ABC Appliance, Inc.
and A-1 Appliance & Air Conditioning, Inc., Arkansas Mechanical Services, Inc.
and Mechanical Services, Inc., Callahan Roach Products and Publications, Inc.,
Central Carolina Air Conditioning Company, Hallmark Air Conditioning, Inc. and
Subsidiary, Sibley Services, Incorporated, Southeast Mechanical Service, Inc.,
Willis Refrigeration, Air Conditioning & Heating, Inc., and Yale, Inc., to the
extent and for the periods indicated in their reports, have been included
herein and in the registration statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Masters, Inc. as of December 31, 1995, December
31, 1996 and June 30, 1997, and for each of the three years in the period
ended December 31, 1996 and for the six month period ended June 30, 1997
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements and schedules of MacDonald-Miller included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Moss Adams LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term encompasses any and all amendments thereto) under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is filed as
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which were omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus concerning
the contents of any contract, agreement or other document referred to are
summaries of the terms of such contract, agreement or other document and are
not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
hereby made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to the Company, reference
is hereby made to the Registration Statement and such exhibits and schedules
filed as a part thereof, which may be inspected, without charge, at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: 7 World Trade Center, Suite 1300, New York, New
York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement may
be obtained from the Public Reference facilities of the Commission, upon
payment of the prescribed fees. The Registration Statement is also available
on the Internet at the Commission's World Wide Web site at http://www.sec.gov.
The Common Stock has been approved for listing on the NYSE, and reports, proxy
statements and other information concerning the Company can be inspected and
copied at the offices of the New York Stock Exchange at 20 Broad Street, New
York, New York 10005.
As a result of the Offering, the Company will be subject to the reporting
requirements under the Exchange Act and, in accordance therewith, will file
reports, proxy statements, information statements and other information with
the Commission. The Company intends to furnish annual reports to its
shareholders containing audited financial statements reported on by an
independent certified public accounting firm and quarterly reports containing
unaudited summary financial information for each of the first three quarters
of each year.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GROUP MAINTENANCE AMERICA CORP. UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements........ F-4
Unaudited Pro Forma Combined Balance Sheet............................... F-6
Unaudited Pro Forma Combined Statements of Operations.................... F-8
Notes to Unaudited Pro Forma Combined Financial Statements............... F-14
HISTORICAL FINANCIAL STATEMENTS
GROUP MAINTENANCE AMERICA CORP. (GROUPMAC PARENT)
Report of Independent Public Accountants................................. F-19
Balance Sheets........................................................... F-20
Statements of Operations................................................. F-21
Statements of Shareholders' Equity....................................... F-22
Statements of Cash Flows................................................. F-23
Notes to Financial Statements............................................ F-24
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
Report of Independent Public Accountants................................. F-29
Consolidated Balance Sheets.............................................. F-30
Consolidated Statements of Operations.................................... F-31
Consolidated Statements of Shareholders' Equity.......................... F-32
Consolidated Statements of Cash Flows.................................... F-33
Notes to Consolidated Financial Statements............................... F-34
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-46
Consolidated Balance Sheets.............................................. F-47
Consolidated Statements of Operations.................................... F-48
Consolidated Statements of Shareholders' Equity.......................... F-49
Consolidated Statements of Cash Flows.................................... F-50
Notes to Consolidated Financial Statements............................... F-51
MASTERS, INC.
Report of Independent Public Accountants................................. F-61
Balance Sheets........................................................... F-62
Statements of Operations................................................. F-63
Statements of Shareholder's Equity....................................... F-64
Statements of Cash Flows................................................. F-65
Notes to Financial Statements............................................ F-66
K&N PLUMBING, HEATING AND AIR CONDITIONING, INC.
Report of Independent Public Accountants................................. F-73
Balance Sheet............................................................ F-74
Statement of Operations.................................................. F-75
Statement of Shareholders' Equity........................................ F-76
Statement of Cash Flows.................................................. F-77
Notes to Financial Statements............................................ F-78
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR
CONDITIONING, INC.
Report of Independent Public Accountants................................. F-83
Combined Balance Sheets.................................................. F-84
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Combined Statements of Operations....................................... F-85
Combined Statements of Shareholders' Equity............................. F-86
Combined Statements of Cash Flows....................................... F-87
Notes to Combined Financial Statements.................................. F-88
ARKANSAS MECHANICAL SERVICES, INC. AND MECHANICAL
SERVICES, INC.
Report of Independent Public Accountants................................ F-93
Combined Balance Sheets................................................. F-94
Combined Statements of Operations....................................... F-95
Combined Statements of Shareholders' Equity............................. F-96
Combined Statements of Cash Flows....................................... F-97
Notes to Combined Financial Statements.................................. F-98
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
Report of Independent Public Accountants................................ F-104
Balance Sheets.......................................................... F-105
Statements of Operations................................................ F-106
Statements of Shareholders' Equity...................................... F-107
Statements of Cash Flows................................................ F-108
Notes to Financial Statements........................................... F-109
CENTRAL CAROLINA AIR CONDITIONING COMPANY
Report of Independent Public Accountants................................ F-112
Balance Sheets.......................................................... F-113
Statements of Operations................................................ F-114
Statements of Shareholders' Equity...................................... F-115
Statements of Cash Flows................................................ F-116
Notes to Financial Statements........................................... F-117
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-122
Consolidated Balance Sheets............................................. F-123
Consolidated Statements of Operations................................... F-124
Consolidated Statements of Shareholders' Equity......................... F-125
Consolidated Statements of Cash Flows................................... F-126
Notes to Consolidated Financial Statements.............................. F-127
SIBLEY SERVICES, INCORPORATED
Report of Independent Public Accountants................................ F-133
Balance Sheets.......................................................... F-134
Statements of Operations................................................ F-135
Statements of Shareholders' Equity...................................... F-136
Statements of Cash Flows................................................ F-137
Notes to Financial Statements........................................... F-138
SOUTHEAST MECHANICAL SERVICE, INC.
Report of Independent Public Accountants................................ F-144
Balance Sheets.......................................................... F-145
Statements of Operations................................................ F-146
Statements of Shareholders' Equity...................................... F-147
Statements of Cash Flows................................................ F-148
Notes to Financial Statements........................................... F-149
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
Report of Independent Public Accountants................................ F-153
Balance Sheets.......................................................... F-154
Statements of Operations................................................ F-155
Statements of Shareholders' Equity...................................... F-156
Statements of Cash Flows................................................ F-157
Notes to Financial Statements........................................... F-158
YALE, INCORPORATED
Report of Independent Public Accountants................................ F-163
Balance Sheets.......................................................... F-164
Statements of Operations................................................ F-165
Statements of Shareholders' Equity...................................... F-166
Statements of Cash Flows................................................ F-167
Notes to Financial Statements........................................... F-168
</TABLE>
F-3
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Group Maintenance America Corp. ("GroupMAC"), of 11
companies acquired to date ("the Pre-Offering Companies") and 13 additional
companies for which definitive agreements have been signed (the "Offering
Acquisition Companies" and together with the Pre-Offering Companies, the
"GroupMAC Companies") as follows:
<TABLE>
<CAPTION>
DATE
COMPANY ACQUIRED
- ------- -----------
<S> <C>
Airtron, Inc....................................................... 5/2/97
A-ABC Appliance, Inc. and A-1 Appliance & Air Conditioning, Inc.... 6/1/97
Hallmark Air Conditioning, Inc..................................... 6/1/97
K&N Plumbing, Heating and Air Conditioning, Inc.................... 6/1/97
Way Residential.................................................... 6/30/97
AA JARL, Inc. (d/b/a "Jarrell Plumbing")........................... 6/30/97
Charlie Crawford, Inc. (d/b/a "Charlie's Plumbing")................ 6/30/97
Costner Brothers, Inc.............................................. 6/30/97
Callahan Roach Products & Publications, Inc. & Callahan Roach &
Associates........................................................ 7/1/97
Sibley Services, Incorporated...................................... 7/1/97
United Service Alliance, L.C....................................... 7/31/97
All Service Electric, Inc.......................................... At offering
Arkansas Mechanical Services, Inc.................................. At offering
Central Carolina Air Conditioning Company.......................... At offering
Evans Services, Inc................................................ At offering
Linford Service Company............................................ At offering
MacDonald-Miller Industries, Inc................................... At offering
Masters, Inc....................................................... At offering
Mechanical Services, Inc........................................... At offering
Paul E. Smith Co., Inc............................................. At offering
Southeast Mechanical Service, Inc.................................. At offering
Van's Comfortemp Air Conditioning, Inc............................. At offering
Willis Refrigeration, Air Conditioning & Heating, Inc.............. At offering
Yale Incorporated.................................................. At offering
</TABLE>
All of the acquisitions have been or will be accounted for utilizing the
purchase method of accounting. The pending acquisitions, which are all
evidenced by signed definitive agreements, are expected to occur at or
immediately following the closing of the Company's initial public offering,
with Airtron, Inc. ("Airtron") as the acquirer for financial accounting
purposes. These unaudited pro forma combined financial statements are based on
the historical financial statements of the acquired companies and estimates
and assumptions set forth below and in the notes to the unaudited pro forma
combined financial statements.
The unaudited pro forma combined balance sheets combine the historical
consolidated balance sheet of the Company and the balance sheets of the
acquisitions completed subsequent to June 30, 1997 with the balance sheets of
the pending acquisitions, as if these acquisitions had occurred on June 30,
1997. The accompanying unaudited pro forma statements of operations of the
Company combine the historical statements of operations of GroupMAC and the
statements of operations of the completed and pending acquisitions as if such
acquisitions had occurred on January 1, 1996.
F-4
<PAGE>
GroupMAC has preliminarily analyzed the savings that it expects to realize
from reductions in salaries and certain benefits to the owners. To the extent
the owners of the GroupMAC Companies have agreed prospectively to reductions
in salary, bonuses and benefits, these reductions have been reflected in the
pro forma combined statements of operations. With respect to other potential
cost savings, GroupMAC cannot fully quantify these savings until completion of
the combination of the GroupMAC Companies. It is anticipated that these
savings will be partially offset by costs related to GroupMAC's new corporate
management and by the costs associated with being a public company. However,
because these savings and costs cannot be accurately quantified at this time,
they have not been included in the pro forma combined financial information of
GroupMAC.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate and may
be revised as additional information becomes available. The pending
acquisitions are subject to certain working capital and long-term debt
adjustments, of which an estimate is reflected in the pro forma adjustments.
The pro forma combined financial data do not purport to represent what
GroupMAC's financial position or results of operations would actually have
been if such transactions had in fact occurred on those dates and are not
necessarily representative of GroupMAC's financial position or results of
operations for any future period. Since the pending and completed acquisitions
have not historically been under common control or management, historical pro
forma combined results may not be indicative of or comparable to future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with other financial statements and notes thereto included
elsewhere in this prospectus. See "Risk Factors" included elsewhere herein.
F-5
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROUPMAC AND MACDONALD- OTHER RESIDENTIAL OTHER COMMERCIAL PRO FORMA PRO FORMA
ASSETS SUBSIDIARIES MILLER MASTERS SERVICE COMPANIES SERVICE COMPANIES COMBINED ADJUSTMENTS COMBINED
- ------ ------------ ---------- ------- ----------------- ----------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents...... $ 5,875 $ -- $ 637 $ 1,792 $ 446 $ 8,750 $ 1,464 $ 10,214
Accounts receiv-
able--
Trade, net of al-
lowance.......... 14,940 14,728 6,270 2,921 7,576 46,435 -- 46,435
Other............ 418 388 343 18 4 1,171 -- 1,171
Due from related
parties.......... -- 673 246 215 74 1,208 (1,208) --
Inventories...... 4,935 814 622 1,060 1,327 8,758 -- 8,758
Costs and esti-
mated earnings in
excess of bill-
ings on uncom-
pleted contracts. 43 1,016 1,420 214 387 3,080 -- 3,080
Refundable income
taxes............ 577 -- -- -- -- 577 -- 577
Deferred tax as-
set.............. 1,607 -- -- 230 -- 1,837 -- 1,837
Prepaid expenses
and other current
assets........... 718 63 71 311 373 1,536 -- 1,536
-------- ------- ------- ------- ------- -------- -------- --------
Total current
assets.......... 29,113 17,682 9,609 6,761 10,187 73,352 256 73,608
PROPERTY AND
EQUIPMENT, net.... 4,721 1,555 610 2,266 2,148 11,300 (206) 11,094
GOODWILL, net..... 18,318 -- -- -- 591 18,909 56,761 75,670
DEFERRED TAX AS-
SETS.............. 10,120 196 -- -- -- 10,316 -- 10,316
OTHER NONCURRENT
ASSETS............ 2,670 519 674 1,383 9 5,255 (1,659) 3,596
-------- ------- ------- ------- ------- -------- -------- --------
Total assets.... $ 64,942 $19,952 $10,893 $10,410 $12,935 $119,132 $ 55,152 $174,284
======== ======= ======= ======= ======= ======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY:
- -----------------------------
CURRENT
LIABILITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounts payable
and accrued ex-
penses........... $ 11,551 $ 7,659 $ 3,312 $ 1,915 $ 4,528 $ 28,965 $ 207 $ 29,172
Short-term debt,
including current
maturities....... 4,577 4,886 1,070 727 1,256 12,516 2,092 14,608
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts........ 1,781 1,716 851 39 317 4,704 -- 4,704
Liability for
warranty costs... 854 -- -- 55 -- 909 -- 909
Deferred service
revenue.......... 1,153 -- -- 1,209 332 2,694 -- 2,694
Income taxes
payable.......... 495 396 -- 345 -- 1,236 -- 1,236
Deferred tax
liabilities...... -- -- -- 26 32 58 1,506 1,564
Other current
liabilities...... 740 -- 395 27 -- 1,162 -- 1,162
Due to
shareholders/affiliates. 537 35 -- 41 748 1,361 29,557 30,918
-------- ------- ------- ------- ------- -------- -------- --------
Total current
liabilities..... 21,688 14,692 5,628 4,384 7,213 53,605 33,362 86,967
LONG-TERM DEBT,
net of current
maturities........ 26,434 708 765 739 817 29,463 1,903 31,366
LEASE OBLIGATIONS. 34 -- -- -- 14 48 -- 48
DEFERRED SERVICE
REVENUE........... 145 -- -- 204 -- 349 -- 349
DEFERRED TAX LIA-
BILITY............ -- -- -- 156 17 173 113 286
DEFERRED COMPENSA-
TION.............. -- 190 -- 372 -- 562 (562) --
DUE TO SHAREHOLD-
ERS............... 9,745 -- -- -- -- 9,745 -- 9,745
OTHER LONG-TERM
LIABILITIES....... 773 -- -- 11 -- 784 -- 784
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. 17,121 -- -- -- -- 17,121 2,150 19,271
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock..... 9 355 5 52 502 923 (911) 12
Additional paid-
in capital....... 23,687 -- -- 41 107 23,835 36,315 60,150
Retained earnings
(deficit)........ (34,694) 4,007 4,495 4,451 4,417 (17,324) (17,370) (34,694)
Treasury stock... -- -- -- -- (152) (152) 152 --
-------- ------- ------- ------- ------- -------- -------- --------
Total sharehold-
ers' equity
(deficit)....... (10,998) 4,362 4,500 4,544 4,874 7,282 18,186 25,468
-------- ------- ------- ------- ------- -------- -------- --------
Total liabili-
ties and share-
holders' equity
(deficit)....... $ 64,942 $19,952 $10,893 $10,410 $12,935 $119,132 $ 55,152 $174,284
======== ======= ======= ======= ======= ======== ======== ========
<CAPTION>
OFFERING PRO FORMA
ASSETS ADJUSTMENTS AS ADJUSTED
- ------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents...... $ (757) $ 9,457
Accounts receiv-
able--
Trade, net of al-
lowance.......... -- 46,435
Other............ -- 1,171
Due from related
parties.......... -- --
Inventories...... -- 8,758
Costs and esti-
mated earnings in
excess of bill-
ings on uncom-
pleted contracts. -- 3,080
Refundable income
taxes............ -- 577
Deferred tax as-
set.............. -- 1,837
Prepaid expenses
and other current
assets........... -- 1,536
----------- -----------
Total current
assets.......... (757) 72,851
PROPERTY AND
EQUIPMENT, net.... -- 11,094
GOODWILL, net..... -- 75,670
DEFERRED TAX AS-
SETS.............. -- 10,316
OTHER NONCURRENT
ASSETS............ (197) 3,399
----------- -----------
Total assets.... $ (954) $173,330
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY:
- -----------------------------
CURRENT
LIABILITIES:
<S> <C> <C>
Accounts payable
and accrued ex-
penses........... $ -- $ 29,172
Short-term debt,
including current
maturities....... (12,501) 2,107
Billings in
excess of costs
and estimated
earnings on
uncompleted
contracts........ -- 4,704
Liability for
warranty costs... -- 909
Deferred service
revenue.......... -- 2,694
Income taxes
payable.......... -- 1,236
Deferred tax
liabilities...... -- 1,564
Other current
liabilities...... -- 1,162
Due to
shareholders/affiliates. (30,918) --
----------- -----------
Total current
liabilities..... (43,419) 43,548
LONG-TERM DEBT,
net of current
maturities........ (31,366) --
LEASE OBLIGATIONS. (48) --
DEFERRED SERVICE
REVENUE........... -- 349
DEFERRED TAX LIA-
BILITY............ -- 286
DEFERRED COMPENSA-
TION.............. -- --
DUE TO SHAREHOLD-
ERS............... -- 9,745
OTHER LONG-TERM
LIABILITIES....... -- 784
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. (19,271) --
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock..... 8 20
Additional paid-
in capital....... 93,142 153,292
Retained earnings
(deficit)........ -- (34,694)
Treasury stock... -- --
----------- -----------
Total sharehold-
ers' equity
(deficit)....... 93,150 118,618
----------- -----------
Total liabili-
ties and share-
holders' equity
(deficit)....... $ (954) $173,330
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-6
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
----------------------------------------------------
CENTRAL OTHER TOTAL OTHER
ASSETS CAROLINA WILLIS CRPP COMPANIES RESIDENTIAL COMPANIES
------ -------- ------ ---- --------- ---------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents....... $ 457 $ 788 $106 $ 441 $ 1,792
Accounts receiv-
able--
Trade, net of
allowance........ 868 1,391 -- 662 2,921
Other............ -- -- -- 18 18
Due from related
parties........... 175 -- -- 40 215
Inventories....... 246 194 47 573 1,060
Costs and esti-
mated earnings in
excess of bill-
ings on
uncompleted con-
tracts............ 168 -- -- 46 214
Refundable income
taxes............. -- -- -- -- --
Deferred tax as-
set............... -- 230 -- -- 230
Prepaid expenses
and other current
assets............ 220 10 -- 81 311
------ ------ ---- ------ -------
Total current
assets.......... 2,134 2,613 153 1,861 6,761
PROPERTY AND
EQUIPMENT, net.... 675 512 118 961 2,266
GOODWILL, net..... -- -- -- -- --
DEFERRED TAX AS-
SETS.............. -- -- -- -- --
OTHER NONCURRENT
ASSETS............ 39 360 -- 984 1,383
------ ------ ---- ------ -------
Total assets.... $2,848 $3,485 $271 $3,806 $10,410
====== ====== ==== ====== =======
<CAPTION>
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
-------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILI-
TIES:
Accounts payable
and accrued ex-
penses............ $ 508 $ 381 $ 90 $ 936 $ 1,915
Short-term debt,
including current
maturities........ 1 221 61 444 727
Billings in ex-
cess of costs and
estimated earn-
ings on
uncompleted con-
tracts............ 39 -- -- -- 39
Liability for
warranty costs.... -- -- -- 55 55
Deferred service
revenue........... 763 229 -- 217 1,209
Income taxes pay-
able.............. -- 284 14 47 345
Deferred tax lia-
bilities.......... -- -- -- 26 26
Other current li-
abilities......... -- -- -- 27 27
Due to related
parties........... -- -- -- 41 41
------ ------ ---- ------ -------
Total current
liabilities..... 1,311 1,115 165 1,793 4,384
LONG-TERM DEBT,
net of current ma-
turities.......... -- -- 18 721 739
LEASE OBLIGATIONS. -- -- -- -- --
DEFERRED SERVICE
REVENUE........... 204 -- -- -- 204
DEFERRED TAX LIA-
BILITY............ -- 147 9 -- 156
DEFERRED COMPENSA-
TION.............. 61 -- -- 311 372
DUE TO SHAREHOLD-
ERS............... -- -- -- -- --
OTHER LONG-TERM
LIABILITIES....... -- -- -- 11 11
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. -- -- -- -- --
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock...... 20 4 1 27 52
Additional paid-
in capital........ 23 -- -- 18 41
Retained earnings
(deficit)......... 1,229 2,219 78 925 4,451
Treasury stock.... -- -- -- -- --
------ ------ ---- ------ -------
Total sharehold-
ers' equity
(deficit)....... 1,272 2,223 79 970 4,544
------ ------ ---- ------ -------
Total liabili-
ties and share-
holders' equity
(deficit)....... $2,848 $3,485 $271 $3,806 $10,410
====== ====== ==== ====== =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
-------------------------------------------------------------------
ARKANSAS SOUTHEAST OTHER TOTAL OTHER
ASSETS YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMMERCIAL COMPANIES
------ ------ ------- ---------- ---------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents....... $ 94 $ 41 $ 20 $ 74 $ 217 $ 446
Accounts receiv-
able--
Trade, net of
allowance........ 1,554 635 1,338 936 3,113 7,576
Other............ -- -- -- -- 4 4
Due from related
parties........... -- 13 18 43 -- 74
Inventories....... 89 126 76 64 972 1,327
Costs and esti-
mated earnings in
excess of bill-
ings on
uncompleted con-
tracts............ 295 55 36 1 -- 387
Refundable income
taxes............. -- -- -- -- -- --
Deferred tax as-
set............... -- -- -- -- -- --
Prepaid expenses
and other current
assets............ 45 244 11 36 37 373
------ ------- ---------- ---------- --------- --------------------
Total current
assets.......... 2,077 1,114 1,499 1,154 4,343 10,187
PROPERTY AND
EQUIPMENT, net.... 694 87 633 430 304 2,148
GOODWILL, net..... -- -- 14 -- 577 591
DEFERRED TAX AS-
SETS.............. -- -- -- -- -- --
OTHER NONCURRENT
ASSETS............ -- -- 1 -- 8 9
------ ------- ---------- ---------- --------- --------------------
Total assets.... $2,771 $1,201 $2,147 $1,584 $5,232 $12,935
====== ======= ========== ========== ========= ====================
<CAPTION>
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
-------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILI-
TIES:
Accounts payable
and accrued ex-
penses............ $ 983 $ 284 $ 795 $ 355 $2,111 $ 4,528
Short-term debt,
including current
maturities........ 245 307 500 135 69 1,256
Billings in ex-
cess of costs and
estimated earn-
ings on
uncompleted con-
tracts............ 19 73 100 125 -- 317
Liability for
warranty costs.... -- -- -- -- -- --
Deferred service
revenue........... -- -- -- -- 332 332
Income taxes pay-
able.............. -- -- -- -- -- --
Deferred tax lia-
bilities.......... -- 32 -- -- -- 32
Other current li-
abilities......... -- -- -- -- -- --
Due to related
parties........... -- -- 35 371 342 748
------ ------- ---------- ---------- --------- --------------------
Total current
liabilities..... 1,247 696 1,430 986 2,854 7,213
LONG-TERM DEBT,
net of current ma-
turities.......... 175 69 192 221 160 817
LEASE OBLIGATIONS. -- -- -- -- 14 14
DEFERRED SERVICE
REVENUE........... -- -- -- -- -- --
DEFERRED TAX LIA-
BILITY............ -- 17 -- -- -- 17
DEFERRED COMPENSA-
TION.............. -- -- -- -- -- --
DUE TO SHAREHOLD-
ERS............... -- -- -- -- -- --
OTHER LONG-TERM
LIABILITIES....... -- -- -- -- -- --
REDEEMABLE PRE-
FERRED STOCK AND
RELATED WARRANTS.. -- -- -- -- -- --
SHAREHOLDERS' EQ-
UITY (DEFICIT)
Common stock...... 1 21 26 -- 454 502
Additional paid-
in capital........ 101 -- -- 6 -- 107
Retained earnings
(deficit)......... 1,247 503 546 371 1,750 4,417
Treasury stock.... -- (105) (47) -- -- (152)
------ ------- ---------- ---------- --------- --------------------
Total sharehold-
ers' equity
(deficit)....... 1,349 419 525 377 2,204 4,874
------ ------- ---------- ---------- --------- --------------------
Total liabili-
ties and share-
holders' equity
(deficit)....... $2,771 $1,201 $2,147 $1,584 $5,232 $12,935
====== ======= ========== ========== ========= ====================
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-7
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
RESIDENTIAL COMMERCIAL
GROUPMAC AND MACDONALD- SERVICE SERVICE GROUPMAC PRO FORMA PRO FORMA
SUBSIDIARIES MILLER MASTERS K&N COMPANIES COMPANIES PARENT ADJUSTMENTS AS ADJUSTED
------------ ---------- ------- ------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES.............. $81,880 $66,059 $39,826 $24,279 $48,964 $46,499 $ -- $ -- $307,507
COST OF SERVICES...... 58,506 56,373 35,854 20,705 30,628 33,845 -- -- 235,911
------- ------- ------- ------- ------- ------- ----- -------- --------
Gross profit......... 23,374 9,686 3,972 3,574 18,336 12,654 -- -- 71,596
SELLING, GENERAL AND
ADMINISTRATIVE EX-
PENSES................ 19,811 7,632 2,484 2,638 16,375 10,367 724 (11,078)(a) 48,953
GOODWILL AMORTIZATION. -- -- -- -- 131 -- -- 1,760 (b) 1,891
------- ------- ------- ------- ------- ------- ----- -------- --------
Income (loss) from
operations........... 3,563 2,054 1,488 936 1,830 2,287 (724) 9,318 20,752
OTHER INCOME (EX-
PENSE):
Interest expense..... (82) (520) (135) (97) (295) (210) (1) 1,213 (c) (127)
Interest income...... 171 -- -- -- 86 22 2 -- 281
Other................ 256 8 -- (3) 231 (1) -- (194)(d) 297
------- ------- ------- ------- ------- ------- ----- -------- --------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION.. 3,908 1,542 1,353 836 1,852 2,098 (723) 10,337 21,203
INCOME TAX PROVISION.. 1,572 574 -- 315 275 46 -- 6,455 (e) 9,237
------- ------- ------- ------- ------- ------- ----- -------- --------
NET INCOME (LOSS)..... $ 2,336 $ 968 $ 1,353 $ 521 $ 1,577 $ 2,052 $(723) $ 3,882 $ 11,966
======= ======= ======= ======= ======= ======= ===== ======== ========
PRO FORMA NET INCOME
PER SHARE............. $ .59
========
SHARES USED IN COMPUT-
ING PRO FORMA NET IN-
COME PER SHARE........ (f) 20,163
========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-8
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
---------------------------------------------------------------
TOTAL OTHER
CENTRAL A-ABC/ OTHER RESIDENTIAL
CAROLINA A-1 WILLIS HALLMARK CRPP COMPANIES COMPANIES
-------- ------ ------ -------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $8,161 $8,546 $6,781 $6,516 $1,553 $17,407 $48,964
COST OF SERVICES. 5,182 5,447 5,033 3,461 311 11,194 30,628
------ ------ ------ ------ ------ ------- -------
Gross profit.... 2,979 3,099 1,748 3,055 1,242 6,213 18,336
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 2,598 2,652 1,206 3,029 1,238 5,652 16,375
GOODWILL AMORTI-
ZATION........... -- 114 -- 17 -- -- 131
------ ------ ------ ------ ------ ------- -------
Income from op-
erations........ 381 333 542 9 4 561 1,830
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (10) (95) (25) (31) (9) (125) (295)
Interest income. 30 11 8 16 -- 21 86
Other........... (40) 1 48 3 (7) 226 231
------ ------ ------ ------ ------ ------- -------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 361 250 573 (3) (12) 683 1,852
INCOME TAX PROVI-
SION............. -- -- 238 18 -- 19 275
------ ------ ------ ------ ------ ------- -------
NET INCOME
(LOSS)........... $ 361 $ 250 $ 335 $ (21) $ (12) $ 664 $ 1,577
====== ====== ====== ====== ====== ======= =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
-----------------------------------------------------------
TOTAL
OTHER
ARKANSAS SOUTHEAST OTHER COMMERCIAL
YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMPANIES
-------- ------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......... $10,065 $6,962 $6,237 $5,282 $17,953 $46,499
COST OF SERVICES. 7,931 5,335 4,773 3,831 11,975 33,845
-------- ------- ---------- ---------- --------- ----------
Gross profit.... 2,134 1,627 1,464 1,451 5,978 12,654
SELLING, GENERAL
AND ADMINISTRA-
TIVE EXPENSES.... 1,729 1,498 1,083 866 5,191 10,367
GOODWILL AMORTI-
ZATION........... -- -- -- -- -- --
-------- ------- ---------- ---------- --------- ----------
Income from op-
erations........ 405 129 381 585 787 2,287
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (30) (31) (51) (55) (43) (210)
Interest income. -- -- -- -- 22 22
Other........... (50) 16 30 (15) 18 (1)
-------- ------- ---------- ---------- --------- ----------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 325 114 360 515 784 2,098
INCOME TAX PROVI-
SION............. -- 42 -- -- 4 46
-------- ------- ---------- ---------- --------- ----------
NET INCOME
(LOSS)........... $ 325 $ 72 $ 360 $ 515 $ 780 $ 2,052
======== ======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-9
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
RESIDENTIAL COMMERCIAL
MACDONALD- SERVICE SERVICE PRO FORMA PRO FORMA
AIRTRON MILLER MASTERS K&N COMPANIES COMPANIES GROUPMAC ADJUSTMENTS AS ADJUSTED
------- ---------- ------- ------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................ $37,127 $36,382 $18,279 $11,893 $23,255 $24,460 $-- $ -- $151,396
COST OF SERVICES........ 26,918 31,590 16,639 10,433 14,762 17,575 -- -- 117,917
------- ------- ------- ------- ------- ------- --- ------- --------
Gross profit........... 10,209 4,792 1,640 1,460 8,493 6,885 -- -- 33,479
SELLING, GENERAL AND AD-
MINISTRATIVE EXPENSES... 9,470 3,706 1,009 1,349 8,021 4,676 -- (4,163)(a) 24,068
GOODWILL AMORTIZATION... -- -- -- -- 61 27 -- 858 (b) 946
------- ------- ------- ------- ------- ------- --- ------- --------
Income from operations. 739 1,086 631 111 411 2,182 -- 3,305 8,465
OTHER INCOME (EXPENSE):
Interest expense....... (37) (244) (67) (38) (149) (102) -- 575 (c) (62)
Interest income........ 42 -- 8 1 38 12 -- -- 101
Other.................. 200 67 -- 4 (18) 10 -- (23)(d) 240
------- ------- ------- ------- ------- ------- --- ------- --------
INCOME BEFORE INCOME TAX
PROVISION .............. 944 909 572 78 282 2,102 -- 3,857 8,744
INCOME TAX PROVISION.... 368 347 -- 150 (38) 283 -- 2,766 (e) 3,876
------- ------- ------- ------- ------- ------- --- ------- --------
NET INCOME (LOSS)....... $ 576 $ 562 $ 572 $ (72) $ 320 $ 1,819 $-- $ 1,091 $ 4,868
======= ======= ======= ======= ======= ======= === ======= ========
PRO FORMA NET INCOME PER
SHARE................... $ .24
========
SHARES USED IN COMPUTING
PRO FORMA NET INCOME PER
SHARE................... (f) 20,163
========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-10
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
-------------------------------------------------------------
TOTAL OTHER
CENTRAL A-ABC/ OTHER RESIDENTIAL
CAROLINA A-1 WILLIS HALLMARK CRPP COMPANIES COMPANIES
-------- ------ ------ -------- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $3,672 $4,314 $3,059 $3,016 $816 $8,378 $23,255
COST OF SERVICES. 2,141 2,802 2,669 1,390 174 5,586 14,762
------ ------ ------ ------ ---- ------ -------
Gross profit.... 1,531 1,512 390 1,626 642 2,792 8,493
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 1,420 1,251 625 1,573 548 2,604 8,021
GOODWILL AMORTI-
ZATION........... -- 58 -- 3 -- -- 61
------ ------ ------ ------ ---- ------ -------
Income (loss)
from operations. 111 203 (235) 50 94 188 411
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (5) (61) (11) (11) (6) (55) (149)
Interest income. 7 1 9 9 -- 12 38
Other........... 10 17 9 (42) 2 (14) (18)
------ ------ ------ ------ ---- ------ -------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 123 160 (228) 6 90 131 282
INCOME TAX PROVI-
SION............. -- -- (95) 34 26 (3) (38)
------ ------ ------ ------ ---- ------ -------
NET INCOME
(LOSS)........... $ 123 $ 160 $ (133) $ (28) $ 64 $ 134 $ 320
====== ====== ====== ====== ==== ====== =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
----------------------------------------------------------
TOTAL
OTHER
ARKANSAS SOUTHEAST OTHER COMMERCIAL
YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMPANIES
------- ------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......... $5,343 $4,210 $3,460 $2,847 $8,600 $24,460
COST OF SERVICES. 4,186 3,236 2,663 2,007 5,483 17,575
------- ------- ---------- ---------- --------- ----------
Gross profit.... 1,157 974 797 840 3,117 6,885
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 873 711 525 388 2,179 4,676
GOODWILL AMORTI-
ZATION........... -- -- -- -- 27 27
------- ------- ---------- ---------- --------- ----------
Income (loss)
from operations. 284 263 272 452 911 2,182
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (16) (17) (23) (28) (18) (102)
Interest income. -- 1 -- -- 11 12
Other........... (22) 15 17 (3) 3 10
------- ------- ---------- ---------- --------- ----------
INCOME (LOSS) BE-
FORE INCOME TAX
PROVISION........ 246 262 266 421 907 2,102
INCOME TAX PROVI-
SION............. -- 198 -- -- 85 283
------- ------- ---------- ---------- --------- ----------
NET INCOME
(LOSS)........... $ 246 $ 64 $ 266 $ 421 $ 822 $ 1,819
======= ======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-11
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
RESIDENTIAL COMMERCIAL
GROUPMAC AND MACDONALD- SERVICE SERVICE GROUPMAC PRO FORMA PRO FORMA
SUBSIDIARIES MILLER MASTERS K&N COMPANIES COMPANIES PARENT ADJUSTMENTS AS ADJUSTED
------------ ---------- ------- ------- ----------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES.............. $42,844 $38,836 $19,318 $10,061 $23,012 $23,870 $ -- $ -- $157,941
COST OF SERVICES...... 30,920 33,451 17,457 8,670 13,684 17,177 -- -- 121,359
------- ------- ------- ------- ------- ------- ------- -------- --------
Gross profit......... 11,924 5,385 1,861 1,391 9,328 6,693 -- -- 36,582
SELLING, GENERAL AND
ADMINISTRATIVE EX-
PENSES................ 18,025 3,788 1,197 1,376 7,820 5,171 1,783 (12,182)(a) 26,978
GOODWILL AMORTIZATION. 31 -- -- -- 55 27 -- 833 (b) 946
------- ------- ------- ------- ------- ------- ------- -------- --------
Income (loss) from
operations........... (6,132) 1,597 664 15 1,453 1,495 (1,783) 11,349 8,658
OTHER INCOME (EX-
PENSE):
Interest expense..... (395) (214) (76) (40) (128) (142) (2) 934 (c) (63)
Interest income...... 153 -- 11 1 59 16 4 -- 244
Other................ 228 167 -- (9) 138 35 -- (51)(d) 508
------- ------- ------- ------- ------- ------- ------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION.. (6,146) 1,550 599 (33) 1,522 1,404 (1,781) 12,232 9,347
INCOME TAX PROVISION.. 349 569 -- (55) 228 24 -- 3,002 (e) 4,117
------- ------- ------- ------- ------- ------- ------- -------- --------
NET INCOME (LOSS)..... $(6,495) $ 981 $ 599 $ 22 $ 1,294 $ 1,380 $(1,781) $ 9,230 $ 5,230
======= ======= ======= ======= ======= ======= ======= ======== ========
PRO FORMA NET INCOME
PER SHARE............. $ .26
========
SHARES USED IN COMPUT-
ING PRO FORMA NET IN-
COME PER SHARE........ (f) 20,163
========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-12
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER RESIDENTIAL SERVICE COMPANIES
-------------------------------------------------------------
TOTAL OTHER
CENTRAL A-ABC/ OTHER RESIDENTIAL
CAROLINA A-1 WILLIS HALLMARK CRPP COMPANIES COMPANIES
-------- ------ ------ -------- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $4,170 $3,419 $3,471 $2,168 $844 $8,940 $23,012
COST OF SERVICES. 2,208 2,227 2,413 1,005 184 5,647 13,684
------ ------ ------ ------ ---- ------ -------
Gross profit.... 1,962 1,192 1,058 1,163 660 3,293 9,328
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 1,485 949 511 1,455 532 2,888 7,820
GOODWILL AMORTI-
ZATION........... -- 48 -- 7 -- -- 55
------ ------ ------ ------ ---- ------ -------
Income (loss)
from operations. 477 195 547 (299) 128 405 1,453
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (2) (34) (10) (11) (8) (63) (128)
Interest income. 27 4 18 4 -- 6 59
Other........... 10 (8) 13 63 (1) 61 138
------ ------ ------ ------ ---- ------ -------
INCOME (LOSS) BE-
FORE INCOME
TAX PROVISION.... 512 157 568 (243) 119 409 1,522
INCOME TAX PROVI-
SION............. -- -- 225 (21) 22 2 228
------ ------ ------ ------ ---- ------ -------
NET INCOME
(LOSS)........... $ 512 $ 157 $ 343 $ (222) $ 97 $ 407 $ 1,294
====== ====== ====== ====== ==== ====== =======
<CAPTION>
OTHER COMMERCIAL SERVICE COMPANIES
----------------------------------------------------------
TOTAL
OTHER
ARKANSAS SOUTHEAST OTHER COMMERCIAL
YALE SIBLEY MECHANICAL MECHANICAL COMPANIES COMPANIES
------- ------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES......... $5,174 $2,259 $4,029 $2,358 $10,050 $23,870
COST OF SERVICES. 3,791 1,679 3,169 1,725 6,813 17,177
------- ------- ---------- ---------- --------- ----------
Gross profit.... 1,383 580 860 633 3,237 6,693
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... 1,052 627 583 409 2,500 5,171
GOODWILL AMORTI-
ZATION........... -- -- -- -- 27 27
------- ------- ---------- ---------- --------- ----------
Income (loss)
from operations. 331 (47) 277 224 710 1,495
OTHER INCOME (EX-
PENSE):
Interest ex-
pense........... (19) (10) (32) (43) (38) (142)
Interest income. -- -- -- -- 16 16
Other........... (9) -- 2 -- 42 35
------- ------- ---------- ---------- --------- ----------
INCOME (LOSS) BE-
FORE INCOME
TAX PROVISION.... 303 (57) 247 181 730 1,404
INCOME TAX PROVI-
SION............. -- (4) -- -- 28 24
------- ------- ---------- ---------- --------- ----------
NET INCOME
(LOSS)........... $ 303 $ (53) $ 247 $ 181 $ 702 $ 1,380
======= ======= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-13
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
Group Maintenance America Corp. ("GroupMAC") was founded in 1996 to create
the leading nationwide provider of heating, ventilation and air conditioning
("HVAC"), plumbing and electrical services to residential and commercial
customers. GroupMAC has acquired 11 companies to date (the "Pre-Offering
Companies") and has definitive agreements to acquire an additional 13
companies (the "Offering Acquisition Companies") concurrently with this
Offering.
The unaudited pro forma combined statements of operations for the year ended
December 31, 1996 utilize the fiscal years of the companies, all of which
approximate GroupMAC's fiscal year end. For the six months ended June 30, 1996
and 1997, the respective companies' actual financial statements for the six
month periods ended June 30, 1996 and 1997 are utilized. The respective
results of operations for the Pre-Offering Companies from January 1, 1997 to
the dates of the acquisitions were combined with GroupMAC and the Offering
Acquisition Companies' actual results of operations for the six months ended
June 30, 1997 to determine the pro forma results of operations for the six
months ended June 30, 1997.
2. COMPLETED AND PENDING ACQUISITIONS:
The acquisitions of the Pre-Offering Companies were financed by borrowings
under a credit agreement dated May 2, 1997 (the "Credit Agreement"). The
Credit Agreement provides secured facilities consisting of a) an 18-month
revolving credit facility providing up to $3 million in revolving loans (the
"Revolving Credit Facility"), b) a six-year term loan of $20 million to help
fund the acquisition of Airtron (the "Airtron Term Loan"), and c) a term loan
facility available until October 31, 1998, providing for up to $12 million in
term loans having a final maturity six years after the date of the Credit
Agreement (the "Acquisition Credit Facility"). The Credit Agreement is more
fully described in Note 7 to the GroupMAC and Subsidiaries Consolidated
Financial Statements contained herein.
The results of operations of the completed transactions are included in the
actual results of operations of the Company from the date of acquisition and
the historical balance sheet at June 30, 1997 includes the acquisitions
completed as of that date. In addition, the Company acquired three of the Pre-
Offering Companies in July 1997 and has signed definitive agreements to
purchase the outstanding capital stock of the Offering Acquisition Companies.
The completion of these pending transactions are subject to various
conditions. All of the completed and pending acquisitions are accounted for as
purchases. The cash portion of the pending acquisitions is assumed to be
provided by proceeds from the Offering.
The following table sets forth the consideration paid or to be paid in (a)
cash, (b) shares of non-convertible, non-voting Preferred Stock to the
shareholders of the Pre-Offering Companies and (c) shares of Common Stock to
the shareholders of the Pre-Offering and Offering Acquisition Companies. The
Preferred Stock is redeemable at any time after the initial issuance, in whole
or in part, at the option of the Company, at an amount equal to the
liquidation value of $1.00 per share plus any accrued but unpaid dividends. In
the event that an initial public offering ("IPO") has not occurred by June 30,
1999, cumulative dividends accrue commencing July 1, 1997 at an annual rate of
$.08 per whole share. Redemption of all outstanding Preferred Stock is
mandatory upon an IPO.
For purposes of computing the estimated purchase price for accounting
purposes, the value of the Preferred Stock is based on the liquidation value
of $1.00 per share and the value of the Common Stock is determined using an
estimated weighted average fair value of approximately $11.00 per share, which
represents a discount rate of approximately 21% from the anticipated initial
public offering price of $14.00 due primarily to restrictions on the sale and
transferability of both the privately issued shares and shares to be issued
simultaneous with the Offering. The restrictions are created by the
limitations on future sales caused by existing securities laws, and an
additional contractual restriction imposed on the shares issued in connection
with the acquisition of the GroupMAC Companies. This contractual provision
prohibits the shareholders from selling, transferring or otherwise disposing
of any shares for one year following the date of acquisition of such shares
and limiting dispositions for one additional year to no more than 36% of their
holdings. The total estimated purchase price of
F-14
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$91.0 million for the Pre-Offering and Offering Acquisition Companies
(excluding Airtron, the accounting acquirer) is comprised of (a) cash of $40.7
million, (b) Preferred Stock of $4.4 million and (c) Common Stock of $45.9
million, based on the estimated fair values per share discussed in this
paragraph.
The estimated purchase price and related allocations of the excess purchase
price are based upon preliminary estimates and are subject to certain purchase
price adjustments at and following closing. Based upon management's
preliminary analysis, it is anticipated that the historical carrying value of
the assets and liabilities of the acquired companies (representing $15.3
million) will approximate fair value. This results in an allocation to
goodwill of approximately $75.7 million. Management has not identified any
other material tangible or identifiable intangible assets to which a portion
of the purchase price could reasonably be allocated. The total consideration
specified below has been reduced by distributions totaling $3.5 million
representing substantially all of the previously taxed undistributed earnings
of such acquired companies from the acquired companies that are S
corporations. The total consideration specified below does not reflect $2.1
million of other distributions of real estate and non operating assets offset
by related liabilities of $1.6 million. However, these amounts are reflected
in the pro forma adjustments as further described in Note 3.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
PREFERRED COMMON TOTAL
CASH STOCK(1) STOCK CONSIDERATION
------- --------- --------- -------------
<S> <C> <C> <C> <C>
PRE-OFFERING COMPANIES
Pre-June 30, 1997
Acquisitions:
Airtron................... $20,849 14,873 4,652 $ 58,192
A-ABC/A-1................. 1,886 -- 359 5,659
Charlie's................. 1,503 -- 157 3,154
Costner................... 501 100 66 1,289
Hallmark.................. 2,081 580 106 3,770
Jarrell................... 150 -- 13 283
K&N....................... 1,568 1,568 403 7,369
Way Residential (asset
purchase)................ 16 -- 6 84
------- ------ ----- --------
28,554 17,121 5,762 79,800
------- ------ ----- --------
Remaining Pre-Offering
Acquisitions:
Callahan Roach............ 2,450 1,050 192 5,517
Sibley.................... 1,202 665 62 2,518
USA (asset purchase)...... 436 436 50 1,395
------- ------ ----- --------
4,088 2,151 304 9,430
------- ------ ----- --------
Total Pre-Offering
Acquisitions............... 32,642 19,272 6,066 89,230
------- ------ ----- --------
OFFERING ACQUISITION
COMPANIES
All Service............... 2,312 -- 202 4,371
Arkansas Mechanical....... 2,121 -- 151 3,408
Central Carolina.......... 3,638 -- 281 6,342
Evans .................... 1,167 -- 102 2,309
Linford .................. 651 -- 126 1,698
MacDonald-Miller.......... 6,002 -- 643 13,204
Masters................... 6,605 -- 491 11,461
Mechanical................ 109 -- 8 196
Paul E. Smith............. -- -- 217 2,205
Southeast Mechanical...... 2,149 -- 154 3,706
Van's..................... 1,559 -- 113 2,825
Willis.................... 2,257 -- 242 4,965
Yale...................... 2,215 -- 158 3,250
------- ------ ----- --------
30,785 -- 2,888 59,940
------- ------ ----- --------
Sub S Corp Distributions.... (1,856) -- (119) --
------- ------ ----- --------
Totals.................. $61,571 19,272 8,835 $149,170
======= ====== ===== ========
</TABLE>
- --------
(1) The preferred stock is valued at $1 per share.
F-15
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a) Records the S Corporation Distributions of $3.5 million of which $1.4
million is expected to be paid using cash on hand of the applicable company
and $2.1 million is expected to be satisfied with a note to the selling
shareholders. Also records the deferred income tax liabilities associated with
converting all acquired companies taxed under Subchapter S of the Internal
Revenue Code (the Code) to corporations taxed under Subchapter C of the Code.
b) Records the final proceeds expected to be received from the Stock
Subscription Agreement dated October 24, 1996, representing the purchase of
668,000 shares by an individual at $3.08 per share.
c) Records the settlement of all shareholder receivables and payables with
cash at closing.
d) Records the elimination of all assets and liabilities of the acquired
companies that are specifically excluded as part of the purchase transaction.
e) Records the proceeds from the final borrowings under the $12 million term
loan facility of the Credit Agreement to fund the acquisitions of three Pre-
Offering Companies that closed subsequent to June 30, 1997.
f) Records the elimination of the historical equity accounts of the three
Pre-Offering Companies discussed in Note 3e and the 13 Offering Acquisition
Companies that will close concurrently with this Offering.
g) Records the purchase of the three Pre-Offering Companies discussed in
Note 3e and the 13 Offering Acquisition Companies that will close concurrently
with this Offering, including the cash, preferred stock and common stock
consideration due to these companies. In connection with the acquisitions of
certain of the GroupMAC Companies, the Company has agreed to make contingent
payments, if earned, to the former owners over periods up to two years based
on formulas in their respective acquisition agreements. These payments will be
made through a combination of cash, shares of Common Stock and warrants to
purchase Common Stock. Amounts earned under the terms of the agreements will
be recorded as additional goodwill and amortized over the remaining
amortization period.
h) Records the proceeds from the issuance of 7,500,000 shares of GroupMAC
Common Stock, net of estimated offering costs of $11,850,000. Offering costs
primarily consist of underwriting discounts and commissions, accounting fees,
legal fees and printing expenses.
i) Records the repayment of the Revolving Credit Facility, the Airtron Term
Loan and the Acquisition Line of Credit with proceeds from the Offering.
j) Records the remaining estimated cash due to the Pre-Offering Companies
and the cash portion to be paid to the Offering Acquisition Companies in
connection with the acquisition of such companies.
k) Records the retirement of GroupMAC preferred stock.
l) Records the retirement of debt assumed in connection with the acquisition
of the GroupMAC Companies.
F-16
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) (G) ADJUSTMENTS
------- ------ ------ ------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $(1,423) $2,056 $ 383 $ 184 $2,900 $(2,636) $ 1,464
Due from related
parties................ (1,208) (1,208)
Property and equipment,
net.................... (206) (206)
Goodwill................ 1,619 107 (14,750) 69,785 56,761
Other noncurrent assets. (1,659) (1,659)
Accounts payable and
accrued expenses....... (207) (207)
Short-term debt,
including current
maturities............. (2,107) 15 (2,092)
Deferred tax
liabilities, current... (1,506) (1,506)
Due to
shareholder/affiliates. 825 (30,382) (29,557)
Long-term debt, net of
current maturities..... 997 (2,900) (1,903)
Deferred tax
liabilities, long-term. (113) (113)
Deferred compensation... 562 562
Preferred stock......... (2,150) (2,150)
Common stock............ (2) 915 (2) 911
Additional paid-in
capital................ (2,054) 147 (34,408) (36,315)
Retained earnings
(deficit).............. 3,530 13,840 17,370
Treasury stock.......... (152) (152)
------- ------ ------ ------ ------ ------- ------- -------
Total................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ====== ====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
OFFERING
(H) (I) (J) (K) (L) ADJUSTMENTS
------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $93,347 $(32,500) $(30,918) $(19,271) $(11,415) $ (757)
Other noncurrent assets. (197) (197)
Short-term debt,
including current
maturities............. 3,833 8,668 12,501
Due to
shareholder/affiliates. 30,918 30,918
Long-term debt, net of
current maturities..... 28,667 2,699 31,366
Lease obligations....... 48 48
Preferred stock......... 19,271 19,271
Common stock............ (8) (8)
Additional paid-in
capital................ (93,142) (93,142)
Retained earnings
(deficit).............. --
------- -------- -------- -------- -------- -------
Total................. $ -- $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== ======== =======
</TABLE>
F-17
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
a) Reflects the prospective reduction in salaries, bonuses and benefits to
the owners of the GroupMAC Companies to which they have agreed. These
reductions in salaries, bonuses and benefits are in accordance with the terms
of the employment agreements. Such employment agreements are primarily for
three years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances.
The salaries, bonuses, benefits and other compensation items recorded in the
individual financial statements of each of the acquired companies amounted to
$15.1 million, $6.2 million and $7.2 million for the twelve month period ended
at or around December 31, 1996 and the six month periods ended June 30, 1996
and 1997, respectively. The contractually agreed upon compensation and
benefits for these same companies, on a going forward basis, amount to $4.0
million, $2.0 million and $2.0 million for the twelve month period ended at or
around December 31, 1996 and the six month periods ended June 30, 1996 and
1997, respectively. The differences between these amounts for the periods
noted herein equate to $11.1 million, $4.2 million and $5.2 million,
respectively and are reflected as pro forma adjustments.
Also reflects the reduction in compensation expense related to the non-
recurring, non-cash compensation charge of $7.0 million recorded by the
Company in the second quarter of 1997 related to the reverse acquisition of
GroupMAC Parent.
b) Reflects the amortization of goodwill to be recorded as a result of the
Acquisitions over a 40-year estimated life.
c) Reflects the elimination of historical interest expense related to the
Credit Agreement and the assumed debt of the GroupMAC Companies resulting from
the payoff of such debt with the proceeds of the Offering. Offsetting this
reduction is interest expense related to the notes issued to fund the S
Corporation Distributions discussed in Note 3a.
d) Reflects the elimination of income and expenses related to a management
benefit plan in effect at one of the GroupMAC Companies. This plan will be
liquidated in connection with the acquisition of the company.
e) Reflects the incremental provision for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
discussed in this Note 4 as well as income taxes on S Corporation earnings.
f) The number of shares estimated to be outstanding on completion of the
Offering include the following:
<TABLE>
<S> <C>
Shares issued in Initial Public Offering............................. 7,500,000
Shares issued under Subscription Agreement dated October 24, 1996.... 2,600,000
Shares issued to Pre-Offering Companies.............................. 6,066,085
Shares issued to Offering Acquisition Companies...................... 2,768,804
Shares issued to Founding Management and Directors................... 1,027,639
Incremental effect of options and warrants on shares outstanding..... 200,315
----------
Shares estimated to be outstanding................................... 20,162,843
==========
</TABLE>
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp.
We have audited the accompanying balance sheets of Group Maintenance America
Corp. (the Company) as of December 31, 1996 and April 30, 1997, and the
related statements of operations, shareholders' equity (deficit), and cash
flows for the periods from October 21, 1996 (inception) to December 31, 1996
and the four months ended April 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Group Maintenance America
Corp. as of December 31, 1996 and April 30, 1997 and the results of its
operations and its cash flows for the periods from October 21, 1996
(inception) to December 31, 1996 and the four months ended April 30, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 11, 1997
F-19
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 228,036 $ 516,838
Due from employee.................................. 1,200 6,759
Prepaid expenses................................... 2,341 --
---------- -----------
Total current assets............................. 231,577 523,597
PROPERTY AND EQUIPMENT, net.......................... 100,996 120,694
OTHER NONCURRENT ASSETS.............................. 19,473 1,094,708
---------- -----------
Total assets..................................... $ 352,046 $ 1,738,999
========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 137,377 $ 527,869
Accrued expenses................................... 6,118 1,478,898
---------- -----------
Total current liabilities........................ 143,495 2,006,767
LONG-TERM DEBT....................................... 75,000 75,000
OTHER LONG-TERM LIABILITIES.......................... -- 73,424
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 50,000,000 shares
authorized; none issued or outstanding............ -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 1,211,345 and 1,611,345 shares issued,
respectively...................................... 1,211 1,611
Additional paid-in capital......................... 8,238,857 8,238,457
Retained earnings.................................. (722,517) (2,503,260)
Subscriptions receivable........................... (7,384,000) (6,153,000)
---------- -----------
Total shareholders' equity (deficit)............. 133,551 (416,192)
---------- -----------
Total liabilities and shareholders' equity
(deficit)....................................... $ 352,046 $ 1,738,999
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
REVENUES............................................. -- --
COST OF SERVICES..................................... -- --
--------- -----------
Gross profit....................................... -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 724,006 1,783,409
--------- -----------
Loss from operations............................. (724,006) (1,783,409)
OTHER INCOME (EXPENSE):
Interest expense................................... (1,118) (2,000)
Interest income.................................... 2,607 4,666
--------- -----------
Loss before income tax provision................. (722,517) (1,780,743)
INCOME TAX PROVISION................................. -- --
--------- -----------
NET LOSS............................................. $(722,517) $(1,780,743)
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL SHAREHOLDERS'
NUMBER OF PAID-IN RETAINED SUBSCRIPTIONS EQUITY
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE (DEFICIT)
--------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 21,
1996 -- $ -- $ -- $ -- $ -- $ --
Net loss.............. -- -- -- (722,517) -- (722,517)
Issuance of
subscription
agreement............ -- -- 8,000,000 -- (8,000,000) --
Issuance of common
stock................ 791,345 791 32,807 -- -- 33,598
Shares issued under
subscription
agreement............ 200,000 200 (200) -- 616,000 616,000
Compensation expense
related to issuance
of management shares. 220,000 220 206,250 -- -- 206,470
--------- ------ ---------- ----------- ----------- -----------
BALANCE, December 31,
1996................... 1,211,345 1,211 8,238,857 (722,517) (7,384,000) 133,551
Net loss.............. -- -- -- (1,780,743) -- (1,780,743)
Shares issued under
subscription
agreement............ 400,000 400 (400) -- 1,231,000 1,231,000
--------- ------ ---------- ----------- ----------- -----------
BALANCE, April 30, 1997. 1,611,345 $1,611 $8,238,457 $(2,503,260) $(6,153,000) $ (416,192)
========= ====== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(722,517) $(1,780,743)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 3,343 12,877
Noncash compensation charge....................... 206,250 --
Changes in operating assets and liabilities:
(Increase) decrease in--
Prepaid expenses and other assets............... (3,541) (3,218)
Other noncurrent assets......................... -- (1,567)
Increase (decrease) in--
Accounts payable................................ 137,377 390,492
Accrued expenses................................ 6,118 979,562
--------- -----------
Net cash used in operating activities.......... (372,970) (402,597)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (104,339) (32,575)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. 649,818 1,231,000
Proceeds from borrowings............................ 75,000 --
Deferred offering costs............................. (19,473) (439,205)
Deferred financing costs............................ -- (67,821)
--------- -----------
Net cash provided by financing activities...... 705,345 723,974
--------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS................ 228,036 288,802
CASH AND CASH EQUIVALENTS, beginning of period....... -- 228,036
--------- -----------
CASH AND CASH EQUIVALENTS, end of period............. $ 228,036 $ 516,838
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. (the Company or GroupMAC Parent) was
incorporated in October 1996 and, therefore, the financial statements reflect
the period since the Company's inception through December 31, 1996 and the
four months ended April 30, 1997. The Company's primary business is to build a
national company providing heating, ventilation and air conditioning (HVAC),
plumbing and electrical services.
Effective April 30, 1997, GroupMAC Parent entered into an Agreement and Plan
of Exchange (the Agreement) with Airtron, Inc. (Airtron), in which $20,366,951
in cash, 14,873,133 shares of GroupMAC Parent preferred stock and 4,652,140
shares of GroupMAC Parent common stock were issued to shareholders of Airtron
in exchange for 100 percent of the then outstanding shares of Airtron. In
connection with this merger the combined company is referred to as GroupMAC
and Subsidiaries. The Agreement closed on May 2, 1997 with the cash portion
funded by the Company's available credit facility and a capital contribution
from a shareholder pursuant to a stock subscription agreement (see note 6).
For accounting purposes, the transaction was accounted for as a reverse
acquisition, as if Airtron acquired GroupMAC Parent, as the former
shareholders of Airtron now own a majority of GroupMAC Parent's common stock.
Concurrent with this transaction, the resulting combined entity will be named
Group Maintenance America Corp. and Subsidiaries. The Company is included in
the consolidated financial statements of GroupMAC and Subsidiaries, presented
elsewhere herein, for periods subsequent to the effective date of the
acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. There were no cash payments for interest or
income taxes in 1996 or in the four months ended April 30, 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures of major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109. Under
this method deferred income taxes are recorded based upon differences between
the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
F-24
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has recorded a full valuation allowance against all deferred tax
assets due to the uncertainty of ultimate realizability. Accordingly, no income
tax benefit has been recorded for the losses incurred.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ ----------
<S> <C> <C>
Deferred offering costs......................... $ 13,648 $ 452,853
Deferred financing costs........................ -- 634,463
Other noncurrent assets......................... 5,825 7,392
-------- ----------
$ 19,473 $1,094,708
======== ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1996 1997
------------ ----------
<S> <C> <C>
Accrued compensation............................ $ -- $ 767,476
Accrued financing costs......................... -- 566,642
Other accrued expenses.......................... 6,118 144,780
------- ----------
$ 6,118 $1,478,898
======= ==========
</TABLE>
F-25
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, APRIL 30,
LIVES 1996 1997
---------- ------------ ---------
<S> <C> <C> <C>
Office equipment, furniture and fixtures..... 3--7 years $ 104,339 $136,358
Less accumulated depreciation................ (3,343) (15,664)
--------- --------
$ 100,996 $120,694
========= ========
</TABLE>
5. LONG-TERM DEBT
CREDIT AGREEMENT
In May 1997, the Company entered into a credit agreement (the Credit
Agreement) with a group of banks providing for secured facilities consisting
of an 18-month revolving credit line of $3 million, a six-year term loan of
$20 million used in connection with the acquisition of Airtron (see note 1)
and a term loan facility, available until October 31, 1998, providing for up
to $12 million in term loans having a final maturity six years after the date
of the Credit Agreement, to be used in connection with future acquisitions.
Loans under the revolving credit facility are limited to a borrowing base
consisting of 70% of eligible accounts receivable. Interest on outstanding
borrowings is payable in quarterly installments beginning August 31, 1997. A
commitment fee of .25% is payable on the unused portion of the revolving
credit line.
The Credit Agreement contains covenants which, among other matters, restrict
or limit the ability of the Company to pay dividends, incur indebtedness, make
capital expenditures and repurchase capital stock. The Company must also
maintain a minimum fixed charge coverage ratio (as defined) and certain other
ratios, among other restrictions.
As of June 30, 1997, available borrowing capacity under the Credit Agreement
was $5.4 million.
LONG-TERM DEBT
On October 24, 1996, the Company executed a $75,000 subordinated note with a
Texas limited liability company. The note bears interest at eight percent (8%)
and is payable upon the earlier of (i) the closing of the Company's first
public offering of its common stock or (ii) two years from the date of the
note. The note is subordinate to all indebtedness of the Company to the banks
and is guaranteed by certain officers of the Company.
6. SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
The Company is authorized to issue 100 million shares of common stock, $.001
par value. There were 1,211,345 and 1,611,345 shares of common stock issued
and outstanding at December 31, 1996 and April 30, 1997, respectively. In
connection with the sale of certain shares of common stock to management, a
nonrecurring, noncash compensation charge of $206,250 was recorded in 1996 to
reflect the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale.
On October 24, 1996, the Company entered into a stock subscription agreement
with an individual allowing for the purchase of up to 2.6 million shares of
common stock at a purchase price of $3.08 per share. Under this agreement, 0.2
million shares were purchased in October 1996, 0.2 million in January 1997 and
0.2 million in
F-26
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
April 1997 and additional shares are required to be purchased upon written
notice from the Company, but in no event later than October 24, 1998.
Subsequent to April 30, 1997, an additional 1.658 million shares have been
purchased under the Subscription Agreement.
PREFERRED STOCK
The Company is authorized to issue up to 50 million shares of preferred
stock, par value $.001 per share, in one or more series. As of December 31,
1996 and April 30, 1997, none were outstanding.
OPTIONS
Under an option agreement dated October 24, 1996, the Company is authorized
to grant stock options with respect to 388,800 shares of the Company's common
stock to directors and senior management.
The following is a summary of stock option activity and number of shares
reserved for outstanding options.
<TABLE>
<CAPTION>
OPTION NUMBER
PRICE PER OF
SHARE SHARES
--------- -------
<S> <C> <C>
Granted................................................ $3.08 291,600
-------
Balance at December 31, 1996........................... 291,600
Granted................................................ $3.08 69,200
-------
Balance at April 30, 1997.............................. 360,800
=======
</TABLE>
At April 30, 1997, options representing 28,000 shares were available to be
granted under the option agreement.
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
option agreement as all options have an exercise price equal to or greater
than the fair value of the underlying stock at date of grant. Had compensation
cost for the Company's stock option plan been determined consistent with the
provisions of SFAS No. 123, net loss would have been increased by the
following pro forma amounts:
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 21,
1996) FOUR MONTHS
THROUGH ENDED
DECEMBER 31, APRIL 30,
1996 1997
------------ -----------
<S> <C> <C>
Net loss:
As reported......................................... $(722,517) $(1,780,743)
Pro forma........................................... $(745,602) $(1,837,870)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
F-27
<PAGE>
GROUP MAINTENANCE AMERICA CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used by the plan for fiscal 1996 and for the four months ending
April 30, 1997: no dividend yield; expected volatility of 0%; risk-free
interest rate of 6.26%; and expected lives of ten years. The weighted average
fair value per share of the options granted during fiscal 1996 and in the four
months ending April 30, 1997 is estimated to be $1.425.
7. INCOME TAXES
There is no Federal income tax provision as losses were incurred and a
valuation allowance has been established against future benefits deriving from
the carryforward of these losses.
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements, primarily
for office space, furniture and service equipment. Minimum annual rental
payments under non-cancelable operating leases as of June 30, 1997, were
approximately as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDING APRIL
30,
------------
<S> <C>
1997......................................... $46,000
1998......................................... 600
1999......................................... 300
=======
</TABLE>
Rental expense under operating leases was $9,032 for the period ended
December 31, 1996 and $49,194 for the four months ending April 30, 1997.
9. EVENT SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT--STOCK SPLIT
On August 16, 1997, the Company's Board of Directors declared a 1-for-2.5
reverse stock split of the Company's common stock. All share data included in
the consolidated financial statements have been restated to reflect the stock
split.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Group Maintenance America Corp. and Subsidiaries (formerly Airtron, Inc.):
We have audited the accompanying consolidated balance sheets of Group
Maintenance America Corp. and Subsidiaries (formerly Airtron, Inc.) (the
Company) as of February 29, 1996, February 28, 1997 and June 30, 1997 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years ended February 28, 1995, February 29, 1996 and
February 28, 1997, and the four months ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Group
Maintenance America Corp. and Subsidiaries (formerly Airtron, Inc.) as of
February 29, 1996, February 28, 1997 and June 30, 1997 and the results of its
operations and its cash flows for the years ended February 28, 1995, February
29, 1996 and February 28, 1997, and the four months ended June 30, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
August 1, 1997
F-29
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY JUNE 30,
29, 1996 28, 1997 1997
----------- ----------- ------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 1,773,643 $ 4,339,406 $ 5,875,027
Accounts receivable, net of allowance
for doubtful accounts of $568,327,
$479,905 and $528,769, respectively... 7,409,168 7,811,108 14,939,516
Inventories............................ 3,686,094 3,354,054 4,934,852
Costs and estimated earnings in excess
of billings on uncompleted contracts.. 36,123 13,229 43,274
Prepaid expenses and other current
assets................................ 351,783 359,427 1,136,436
Deferred tax assets.................... 1,338,000 764,500 1,607,450
Refundable income taxes................ -- 3,235,500 576,467
----------- ----------- ------------
Total current assets................. 14,594,811 19,877,224 29,113,022
PROPERTY AND EQUIPMENT, net.............. 1,387,456 1,289,242 4,721,461
GOODWILL, net of accumulated amortization
of $30,795.............................. -- -- 18,317,831
DEFERRED TAX ASSET....................... 4,957,700 3,195,100 10,120,000
OTHER NONCURRENT ASSETS.................. 7,342,260 2,791,491 2,669,975
----------- ----------- ------------
Total assets......................... $28,282,227 $27,153,057 $ 64,942,289
=========== =========== ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt.......... $ -- $ 148,994 $ 4,577,200
Accounts payable....................... 2,958,771 2,882,012 7,089,459
Accrued expenses....................... 5,231,529 7,765,355 5,315,951
Due to related parties................. -- -- 537,421
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 1,554,948 1,469,002 1,780,467
Deferred service contract revenue...... 732,655 738,559 1,153,186
Income taxes payable................... 832,023 536,498 494,479
Other current liabilities.............. -- -- 740,000
----------- ----------- ------------
Total current liabilities............ 11,309,926 13,540,420 21,688,163
LONG-TERM DEBT, net of current
maturities.............................. -- 1,140,933 26,467,994
COMPENSATION AND BENEFITS PAYABLE........ 9,909,809 5,831,263 --
DUE TO SHAREHOLDERS...................... -- -- 9,744,500
OTHER LONG-TERM LIABILITIES.............. 689,100 650,000 918,479
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND RELATED
WARRANTS................................ -- -- 17,121,131
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value;
100,000,000 shares authorized;
5,692,261, 4,652,140 and 8,707,998
shares issued and outstanding,
respectively.......................... 5,692 4,652 8,708
Additional paid-in capital............. 2,701,116 2,646,093 25,740,895
Retained earnings (deficit)............ 3,666,584 3,339,696 (34,693,811)
Subscriptions receivable............... -- -- (2,053,770)
----------- ----------- ------------
Total shareholders' equity (deficit). 6,373,392 5,990,441 (10,997,978)
----------- ----------- ------------
Total liabilities and shareholders'
equity (deficit).................... $28,282,227 $27,153,057 $ 64,942,289
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED JUNE
YEAR ENDED YEAR ENDED YEAR ENDED 30,
FEBRUARY FEBRUARY FEBRUARY ------------------------
28, 1995 29, 1996 28, 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $72,225,889 $73,764,643 $81,879,819 $25,956,840 $31,085,514
COST OF SERVICES........ 50,459,914 52,673,935 58,505,888 18,925,670 22,686,136
----------- ----------- ----------- ----------- -----------
Gross profit.......... 21,765,975 21,090,708 23,373,931 7,031,170 8,399,378
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 17,882,164 17,614,854 19,811,136 5,461,278 6,189,127
COMPENSATION EXPENSE
FROM REVERSE
ACQUISITION............ -- -- -- -- 6,978,300
WARRANT COMPENSATION.... 2,400,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........... 1,483,811 3,475,854 3,562,795 1,569,892 (4,768,049)
OTHER INCOME (EXPENSE):
Interest expense...... -- -- (82,211) (37,768) (352,666)
Interest income....... 75,835 67,744 170,918 20,100 93,212
Other................. 140,078 246,219 256,249 23,535 2,821
----------- ----------- ----------- ----------- -----------
Income (loss) before
income tax
provision.......... 1,699,724 3,789,817 3,907,751 1,575,759 (5,024,682)
INCOME TAX PROVISION.... 910,664 1,650,956 1,571,680 633,614 800,000
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....... $ 789,060 $ 2,138,861 $ 2,336,071 $ 942,145 $(5,824,682)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 8,008,122 6,190,337 5,172,201 5,172,201 8,875,295
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER
SHARE.................. $ 0.10 $ 0.35 $ 0.45 $ 0.18 $ (0.66)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY SUBSCRIPTIONS SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK RECEIVABLE EQUITY (DEFICIT)
---------- -------- ----------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 28,
1994................... 502,767 $502,767 $ -- $ 7,305,936 $(5,633,300) $ -- $ 2,175,403
Adjustment to convert
number and par value
of Airtron shares to
shares of GroupMAC
Parent ............... 8,825,065 (493,439) 493,439 -- -- -- --
---------- -------- ----------- ------------ ----------- ----------- ------------
RESTATED BALANCE, Febru-
ary 28, 1994........... 9,327,832 9,328 493,439 7,305,936 (5,633,300) -- 2,175,403
Purchases of stock..... -- -- -- -- (1,534,896) -- (1,534,896)
Cancellation of trea-
sury stock............ (2,639,420) (2,640) (139,626) (4,618,714) 4,760,980 -- --
Contributions of bene-
fit trust............. -- -- -- -- 2,125,866 -- 2,125,866
Compensation on war-
rants................. -- -- 2,400,000 -- -- -- 2,400,000
Net income............. -- -- -- 789,060 -- -- 789,060
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, February 28,
1995................... 6,688,412 6,688 2,753,813 3,476,282 (281,350) -- 5,955,433
Purchases of stock..... -- -- -- -- (2,657,565) -- (2,657,565)
Cancellation of trea-
sury stock............ (996,151) (996) (52,697) (1,948,559) 2,002,252 -- --
Contributions to bene-
fit trust............. -- -- -- -- 936,663 -- 936,663
Net income............. -- -- -- 2,138,861 -- -- 2,138,861
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, February 29,
1996................... 5,692,261 5,692 2,701,116 3,666,584 -- -- 6,373,392
Purchases of stock..... -- -- -- -- (2,112,474) -- (2,112,474)
Repurchase of warrants. -- -- -- (600,000) -- -- (600,000)
Cancellation of trea-
sury stock............ (1,040,121) (1,040) (55,023) (2,056,411) 2,112,474 -- --
Distributions to share-
holders............... -- -- -- (6,548) -- -- (6,548)
Net income............. -- -- -- 2,336,071 -- -- 2,336,071
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, February 28,
1997................... 4,652,140 4,652 2,646,093 3,339,696 -- -- 5,990,441
Purchase of Acquired
Companies............. 2,713,858 2,714 23,065,369 -- -- (6,153,000) 16,915,083
Preferred Stock issued
to Airtron sharehold-
ers in reverse acqui-
sition................ -- -- -- (14,873,133) -- -- (14,873,133)
Distribution to Airtron
shareholders in
reverse acquisition... -- -- -- (17,335,692) -- -- (17,335,692)
Shares issued under
subscription agree-
ment.................. 1,332,000 1,332 (1,332) -- -- 4,099,230 4,099,230
Exercise of options.... 10,000 10 30,765 -- -- -- 30,775
Net (loss)............. -- -- -- (5,824,682) -- -- (5,824,682)
---------- -------- ----------- ------------ ----------- ----------- ------------
BALANCE, June 30, 1997.. 8,707,998 $ 8,708 $25,740,895 $(34,693,811) $ -- $(2,053,770) $(10,997,978)
========== ======== =========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ 789,060 $ 2,138,861 $ 2,336,071 $ 942,145 $ (5,824,682)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 228,759 238,338 208,037 71,836 194,477
Gain from sale of
property and
equipment............. 6,993 (9,222) (223,593) (5,521) --
Deferred income taxes.. (2,295,336) (1,400,500) 2,336,100 1,204,700 2,338,223
Non-cash compensation
expense from reverse
acquisition........... -- -- -- -- 6,978,300
Warrant compensation... 2,400,000 -- -- -- --
Changes in operating
assets and
liabilities, net of
effect of
acquisitions
accounted for as
purchases:
(Increase) decrease
in -
Accounts receivable.. (571,196) (403,499) (401,940) (1,756,106) (2,078,958)
Inventories.......... (177,969) 171,699 332,040 456,037 29,553
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... (174,216) 163,218 22,894 -- (30,045)
Prepaid expenses and
other current
assets.............. 2,718 (33,805) (7,644) (1,068,085) 71,952
Refundable income
taxes............... -- -- (3,235,500) -- 431,378
Other noncurrent
assets.............. -- -- -- -- 4,821
Increase (decrease)
in -
Accounts payable..... (2,464) 425,430 (76,759) 1,400,875 461,236
Accrued expenses..... 417,434 667,499 2,533,826 (435,002) (5,848,590)
Due to related
parties............. -- -- -- -- (10,395)
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... 248,316 (143,888) (85,946) 340,007 311,465
Deferred service
contract revenue.... 46,264 23,516 5,904 27,844 (104,989)
Income tax payable... (77,096) 590,661 (295,525) (1,597,897) (221,172)
Other current
liabilities......... -- -- -- -- 619,120
Compensation and
benefits payable.... 1,498,152 1,579,127 254,920 (1,086,957) (8,513)
Other long-term
liabilities......... -- -- -- -- 121,405
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities......... 2,339,419 4,007,435 3,702,885 (1,506,124) (2,565,414)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Cash paid for
acquisitions, net of
cash acquired of
$2,011,220............ -- -- -- -- (5,342,855)
Deferred offering
costs................. -- -- -- -- (545,690)
Purchases of property
and equipment......... (370,289) (246,009) (182,256) (49,048) (364,955)
Proceeds from sale of
property and
equipment............. -- 56,909 296,026 -- --
Proceeds from note
receivable............ 29,396 -- 155,803 -- --
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) investing
activities......... (340,893) (189,100) 269,573 (49,048) (6,253,500)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Purchases of stock..... (1,534,896) (2,657,565) (787,174) (205,471) --
Repurchase of warrants. -- -- (538,500) -- --
Proceeds from long-term
debt.................. -- -- -- -- 29,600,000
Payments of long-term
debt.................. -- -- (35,373) -- (2,976,681)
Payments of other long-
term obligations...... -- (37,000) (39,100) (13,000) --
Deferred offering
costs................. -- -- -- -- (31,838)
Issuance of stock...... -- -- -- -- 4,099,230
Exercise of options.... -- -- -- -- 30,775
Distributions to
shareholders.......... -- -- (6,548) -- (20,366,951)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities......... (1,534,896) (2,694,565) (1,406,695) (218,471) 10,354,535
----------- ----------- ----------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 463,630 1,123,770 2,565,763 (1,773,643) 1,535,621
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 186,243 649,873 1,773,643 1,773,643 4,339,406
----------- ----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 649,873 $ 1,773,643 $ 4,339,406 $ -- $ 5,875,027
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Group Maintenance America Corp. (GroupMAC Parent) was incorporated as a
Texas corporation in October, 1996 to build a national company providing
heating, ventilation and air conditioning (HVAC), plumbing and electrical
services.
Effective April 30, 1997, GroupMAC Parent entered into an Agreement and Plan
of Exchange (the Agreement) with Airtron, Inc. (Airtron), in which $20,366,951
in cash, 14,873,131 shares of GroupMAC Parent preferred stock and 4,652,140
shares of GroupMAC Parent common stock were issued to shareholders of Airtron
in exchange for 100 percent of the then outstanding shares of Airtron.
Although for legal purposes Airtron was acquired by GroupMAC Parent, for
accounting purposes, the transaction was accounted for as a reverse
acquisition, as if Airtron acquired GroupMAC Parent, due to the fact that the
former shareholders of Airtron then owned a majority of GroupMAC Parent's
common stock. In connection with the purchase of GroupMAC Parent, the
consideration paid to the shareholders of GroupMAC Parent was recorded as a
nonrecurring compensation expense of $6,978,300 in the accompanying statements
of operations for the four month period ended June 30, 1997. The consolidated
financial statements presented herein for the periods prior to the effective
date of the acquisition only include the accounts of Airtron. The consolidated
statements of shareholders' equity have been converted from Airtron's capital
stock structure to GroupMAC Parent's capital stock structure to reflect the
exchange of shares pursuant to the Agreement. The cash paid to the Airtron
shareholders, net of existing liabilities to former shareholders, has been
treated as a distribution to the Airtron shareholders. The consolidated group
of companies are collectively referred to herein as GroupMAC and Subsidiaries
or "the Company." All significant intercompany balances have been eliminated.
Concurrent with the initial public offering of the Company's common stock, the
Company intends to change its fiscal year end from February 28 to December 31.
Airtron was incorporated in 1970 as a Delaware Corporation. Airtron installs
and services brand name heating and air conditioning equipment for residential
and commercial customers located in Ohio, Indiana, Kentucky, Florida and
Texas.
In May and June 1997, the Company acquired in separate transactions seven
additional residential or commercial service companies (the Acquired
Companies), through a combination of cash and preferred and common stock of
the Company. Subsequent to June 30, 1997 the Company acquired three additional
companies and has signed definitive agreements to acquire 13 others.
The acquisitions of the Acquired Companies were accounted for as purchase
business combinations, with the results of operations included in the
Company's financial statements from the effective date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim consolidated financial statements for the four months ended June
30, 1996, are unaudited, and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
F-34
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
from service and maintenance contracts are recognized over the life of the
contracts. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
Cash equivalents of approximately $911,000, $2,189,000 and $3,823,000 at
February 29, 1996, February 28, 1997 and June 30, 1997, respectively, consist
of short-term investments in money market funds. For purposes of the
statements of cash flows, the Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. Cash
payments for income taxes were approximately $2,946,000, $2,452,000,
$2,586,000 and $456,000 for the years ended February 28, 1995, February 29,
1996 and February 28, 1997 and the four months ended June 30, 1997,
respectively.
Investments
The Company classifies all investments held for the deferred compensation
plan with readily determinable fair values as trading securities. These
securities are recorded at fair value with unrealized holding gains and losses
reported in earnings. Where readily determinable fair values are not
available, investments are recorded at cost.
Inventories
Inventories consist primarily of purchased materials and supplies. The
inventory is valued at the lower of cost or market, with cost determined on a
first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the useful lives of the
assets. Leasehold improvements are amortized over the lesser of the remaining
lease term or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures of major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of
F-35
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows compared to the carrying value of goodwill. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Warranty Costs
The Company generally warrants all of its work for a period of one year from
the date of installation. A provision for estimated warranty costs is made at
the time a product is sold or service is rendered.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective March 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
Earnings Per Share, which the Company is required to adopt for both interim
and annual periods ending after December 15, 1997. SFAS 128 simplifies the
earnings per share calculation by replacing primary earnings per share with
basic earnings per share, as well as requiring the presentation of fully
diluted earnings per share. Basic earnings per share is computed by dividing
reported earnings available to common shareholders by the weighted average
shares outstanding. The Company's current presentation of net income per share
is the same as the fully diluted earnings per share presentation required by
SFAS 128.
F-36
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Net income per share is calculated by dividing net income by the weighted
average number of shares of common stock and common stock equivalents. Stock
options are regarded as common stock equivalents and are therefore considered
in net income per share calculations if dilutive. Common stock equivalents are
computed using the treasury stock method. All stock options are dilutive and,
accordingly, primary and fully diluted net income per share are the same.
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, ---------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issued in the
acquisition of Airtron. 8,008,122 6,190,337 5,172,201 5,172,201 4,652,140
Group Maintenance
America Corp. shares
outstanding, excluding
acquisitions........... -- -- -- -- 2,953,345
Shares issued for the
acquisition of the
Acquired Companies..... -- -- -- -- 1,102,513
Stock options, net of
assumed repurchase of
common shares as
treasury stock......... -- -- -- -- 167,297
--------- --------- --------- --------- ---------
8,008,122 6,190,337 5,172,201 5,172,201 8,875,295
========= ========= ========= ========= =========
</TABLE>
3. BUSINESS COMBINATIONS
During May and June 1997, the Company acquired the Acquired Companies for an
aggregate consideration of approximately $21,608,000. This consisted of
$7,705,000 in cash and payables to the former shareholders of the Acquired
Companies, and 2,248,000 and 1,110,019 shares of preferred and common stock,
respectively. The preferred stock was valued at its redemption value of $1 per
share. The common stock was valued at its estimated fair value at the time of
the respective acquisition. The Company financed the cash portion of the
purchase consideration through borrowings under its credit agreement. Purchase
price consideration is subject to final adjustment. The allocation of purchase
price to the assets acquired and liabilities assumed has been initially
assigned and recorded based on preliminary estimates of fair value and may be
revised as additional information becomes available.
F-37
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma data presented below consists of the combined income
statement data for GroupMAC Parent, Airtron and the Acquired Companies as if
the acquisitions were effective on the first day of the period being reported
(in thousands, except for per share amounts) (unaudited).
<TABLE>
<CAPTION>
FISCAL FOUR MONTHS
YEAR ENDED
1996 JUNE 30, 1997
-------- -------------
<S> <C> <C>
Revenues.......................................... $128,500 $43,900
======== =======
Net income........................................ $ 6,000 $ 1,000
======== =======
Net income per share.............................. $ 0.68 $ 0.11
======== =======
</TABLE>
The above pro forma amounts for 1996 include the historical information for
each of the companies using their historical year end, rather than the year
end of the Company, as the Acquired Companies year end approximates the
Company's. The pro forma amounts for 1997 include the results of operations
for each of the companies for the four months ended June 30, 1997. Pro forma
adjustments included in the amounts above include compensation differentials,
adjustment for goodwill amortization over a period of 40 years, elimination of
historical interest expense on long-term debt which was repaid, the addition
of interest expense on borrowed funds used to finance the acquisition of
Airtron and the Acquired Companies, and adjustment to the federal and state
income tax provisions based on pro forma operating results. Net income per
share for 1996 and 1997 assumes all shares issued for the acquisitions of
Airtron and the Acquired Companies had been outstanding for the periods
presented.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY JUNE 30,
29, 1996 28, 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Investments restricted for benefit of
employees:
Recorded at fair value..................... $4,033,097 $ -- $ --
Recorded at cost........................... 3,153,360 2,791,491 --
Note receivable.............................. 155,803 -- --
Refundable income taxes...................... -- -- 2,183,883
Other noncurrent assets...................... -- -- 486,092
---------- ---------- ----------
$7,342,260 $2,791,491 $2,669,975
========== ========== ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<S> <C> <C> <C>
Accrued payroll costs and benefits............ $4,423,249 $7,006,790 $3,063,446
Warranties.................................... 494,506 544,031 853,592
Other accrued expenses........................ 313,774 214,534 1,398,913
---------- ---------- ----------
$5,231,529 $7,765,355 $5,315,951
========== ========== ==========
</TABLE>
F-38
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, JUNE 30,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs incurred....................... $ 14,613,066 $ 13,125,649 $ 16,489,091
Estimated earnings recognized........ 2,983,612 2,275,287 3,129,035
------------ ------------ ------------
17,596,678 15,400,936 19,618,126
Less billings on contracts........... (19,115,503) (16,856,709) (21,355,319)
------------ ------------ ------------
$ (1,518,825) $ (1,455,773) $ (1,737,193)
============ ============ ============
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying consolidated balance sheets under the following captions:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY JUNE 30,
1996 28, 1997 1997
------------ ----------- -----------
<S> <C> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts... $ 36,123 $ 13,229 $ 43,274
Billings in excess of costs and
estimated earnings on uncompleted
contracts.............................. (1,554,948) (1,469,002) (1,780,467)
----------- ----------- -----------
$(1,518,825) $(1,455,773) $(1,737,193)
=========== =========== ===========
</TABLE>
6. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
were as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL FEBRUARY FEBRUARY JUNE 30,
LIVES 29, 1996 28, 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land........................ -- $ 244,813 $ 217,551 $ 217,551
Building and improvements... 20-30 years 927,631 639,903 639,903
Service and other vehicles.. 4-7 years 114,837 134,795 2,533,669
Machinery and equipment..... 5-10 years 679,748 686,319 1,156,245
Office equipment, furniture
and fixtures............... 5-10 years 667,220 724,013 1,313,933
Leasehold improvements...... -- 542,422 550,033 687,214
----------- ----------- -----------
3,176,671 2,952,614 6,548,515
Less accumulated
depreciation............... (1,789,215) (1,663,372) (1,827,054)
----------- ----------- -----------
$ 1,387,456 $ 1,289,242 $ 4,721,461
=========== =========== ===========
</TABLE>
F-39
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHORT-AND LONG-TERM DEBT
Short-and long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY JUNE 30,
28, 1997 1997
---------- -----------
<S> <C> <C>
Note payable to former shareholder at 8.25%, due in
monthly installments of $20,822 including interest,
repaid in May 1997 with proceeds from the Company's
Credit Agreement.................................... $1,289,927 $ --
Credit Agreement:
Revolving credit loan.............................. -- 500,000
Advancing acquisition line of credit loan.......... -- 9,100,000
Term loan.......................................... -- 20,000,000
Equipment installment loans payable to banks and
other financial institutions, interest varying from
7.5% to 10.25%, payable in monthly installments
including interest, final installment due January
1998................................................ -- 450,230
Equipment installment loans payable to banks,
interest varying from 8.75% to 9.0%, secured by
certain equipment, payable in monthly and quarterly
installments including interest, final installment
due November 2000................................... -- 471,295
Notes payable to the former shareholders of an
Acquired Company at 8%, payable in monthly
installments through November 2004.................. -- 523,669
---------- -----------
Total short- and long-term debt.................. 1,289,927 31,045,194
Less short-term borrowings and current maturities.... (148,994) (4,577,200)
---------- -----------
$1,140,933 $26,467,994
========== ===========
</TABLE>
On May 2, 1997, the Company entered into a credit agreement (the Credit
Agreement) with a total commitment of $35 million. The Credit Agreement
consists of three portions: (a) a revolving credit agreement up to $3 million
for use as working capital, (b) a $12 million advancing acquisition line of
credit to finance the acquisitions, and (c) a $20 million term loan to finance
the acquisition of Airtron. Borrowings under the Credit Agreement bear
interest through October 1998 at the prime rate. Beginning in November 1998,
the interest rate is adjusted for margins ranging from 0% to 0.5%, depending
on the ratio of the Company's funded debt to its historical earnings before
interest, taxes, depreciation and amortization, subject to certain
adjustments, as approved by the lender. The Company is subject to commitment
fees of 0.25% per annum for the unutilized portion of the revolving credit
agreement and the advancing acquisition line of credit. The Credit Agreement
prohibits the Company from incurring additional indebtedness, except for
indebtedness existing at the time of execution of the Credit Agreement,
letters of credit up to $750,000, earn-out obligations and other limitations.
The Company may not pay any dividends or repurchase outstanding shares of the
Company's stock, except for the purchase of stock of departing officers and
employees. The Credit Agreement also requires the Company to maintain certain
levels of consolidated net worth and comply with certain other financial
covenants. The Company's subsidiaries have guaranteed all borrowings under the
Credit Agreement. All outstanding borrowings under the revolving credit
agreement are due on or before October 31, 1998, and the advancing acquisition
line of credit and the term loan mature on April 30, 2003. At June 30, 1997,
the applicable interest rate is 8.5%.
F-40
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of the long-term debt as of June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING
JUNE
30,
------
<S> <C>
1998..................................... $ 4,577,200
1999..................................... 5,168,487
2000..................................... 5,498,520
2001..................................... 5,450,153
2002..................................... 5,450,153
Thereafter............................... 4,900,681
-----------
$31,045,194
===========
</TABLE>
8. DUE TO SHAREHOLDERS
Under the Agreement, part of the cash purchase price paid to shareholders
relates to the tax benefits which will be received by the Company related to
the exercise of previously outstanding warrants and distributions under
deferred compensation arrangements. A liability and deferred tax asset of
$9,744,500 have been recognized in the accompanying consolidated financial
statements for an estimate of these amounts as of June 30, 1997.
9. STOCK-BASED COMPENSATION PLANS
Prior to the Agreement, under an option agreement dated October 24, 1996,
GroupMAC Parent granted stock options to directors and senior management to
purchase an aggregate of 360,800 shares at an exercise price of $3.08.
Subsequent to the Agreement the Company did not grant any stock options
through June 30, 1997. Under this option agreement, options representing
350,800 shares of common stock were outstanding at June 30, 1997 and there
were options representing 28,000 shares of common stock available for grant.
The following is a summary of stock option activity and number of shares
reserved for outstanding options.
<TABLE>
<CAPTION>
OPTION NUMBER
PRICE PER OF
SHARE SHARES
--------- -------
<S> <C> <C>
Granted............................................... $3.08 291,600
-------
Balance at December 31, 1996.......................... 291,600
Granted............................................... $3.08 69,200
-------
Balance at April 30, 1997, date of Agreement.......... 360,800
Exercised............................................. $3.08 (10,000)
-------
Balance at June 30, 1997.............................. 350,800
=======
</TABLE>
F-41
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has adopted the disclosure-only provisions of the Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Accordingly, compensation cost has been recognized only for the
options which have an exercise price less than the fair value of the
underlying stock at date of grant. Had compensation cost for the Company's
stock option plan been determined consistent with the provisions of SFAS No.
123, net income and net income per share would have been decreased by the
following pro forma amounts:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
JUNE 30,
1997
-----------
<S> <C>
Net Loss:
As Reported...................................................... $(5,824,682)
Pro forma........................................................ $(5,853,682)
Net Loss Per Share:
As Reported...................................................... $ (0.66)
Pro forma........................................................ $ (0.66)
</TABLE>
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and
additional awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for fiscal 1996 for the plan: no dividend yield; expected
volatility of 0%; risk-free interest rate of 6.26%; and expected lives of ten
years. The weighted average fair value per share of the options granted prior
to the Agreement is estimated to be $1.425.
In July 1994, Airtron extended 60,000 warrants to purchase common shares at
$1 each until August 1, 2011. The appraisal for market value of Airtron's
stock at that time, was $40 per share, resulting in a charge of $2,400,000 and
an offsetting increase in retained earnings in fiscal 1995. All 60,000
warrants were outstanding at February 29, 1996. In August 1996, 15,000 of
these warrants were purchased from a former shareholder for $538,500,
resulting in a reduction in retained earnings for the original recorded value
of the warrants of $600,000 with the offset recorded as other income. At
February 28, 1997, 45,000 warrants were outstanding. In connection with the
Agreement these warrants were exchanged for cash and preferred and common
shares of GroupMAC Parent.
Airtron had deferred compensation arrangements for certain members of
management and the Board of Directors.The assets and liabilities previously
recorded by the Company have been reflected as distributions in the
accompanying financial statements.
10. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 100 million shares of common stock, $.001
par value. There are 8,707,998 shares of common stock outstanding at June 30,
1997.
On October 24, 1996, the Company entered into a stock subscription agreement
with an individual allowing for the purchase of up to 2.6 million shares of
common stock at a purchase price of $3.08 per share. Under this agreement, 0.2
million shares were purchased in October, 1996, 0.2 million in January, 1997,
0.2 million in April, 1997, 880,000 on May 5, 1997, 452,000 on June 12, 1997,
326,000 on July 14, 1997 and additional shares are required to be purchased
upon written notice from the Company, but in no event later than October 24,
1998.
F-42
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PREFERRED STOCK
The Company is authorized to issue up to 50 million shares of preferred
stock, par value of $.001 per share, in one or more series. The non-
convertible, non-voting preferred stock is redeemable at any time after the
initial issuance, in whole or in part, at the option of the Company, at an
amount equal to the liquidation value of $1.00 per share plus any accrued but
unpaid dividends. In the event that an initial public offering (IPO) has not
occurred by June 30, 1999, cumulative dividends accrue commencing July 1, 1999
at an annual rate of $.08 per whole share. Redemption of all outstanding
preferred stock is mandatory upon an IPO.
In connection with certain acquisitions, the Company has issued 15,407,509
shares of preferred stock and warrants to purchase 1,713,622 shares of
preferred stock. Subsequent to June 30, 1997, an additional 2,150,462 shares
of preferred stock were issued in connection with other acquisitions (see Note
16).
11. INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY JUNE 30,
28, 1995 29, 1996 28, 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal................... $ 2,590,000 $ 2,529,500 $(1,020,024) $(1,656,723)
State and local........... 616,000 536,456 384,338 118,500
----------- ----------- ----------- -----------
3,206,000 3,065,956 (635,686) (1,538,223)
Deferred:
Federal................... (2,295,336) (1,415,000) 2,207,366 2,338,223
State and local........... -- -- -- --
----------- ----------- ----------- -----------
$ 910,664 $ 1,650,956 $ 1,571,680 $ 800,000
=========== =========== =========== ===========
</TABLE>
Total income tax expense differs from the amounts computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, JUNE 30,
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax provision (benefit) at
statutory rate............ $577,906 $1,288,538 $1,328,635 $(1,708,392)
Increase (decrease)
resulting from:
State income taxes, net
of federal benefit...... 406,560 354,061 253,663 78,210
Compensation expense from
reverse acquisition..... -- -- -- 2,372,622
Other.................... (73,802) 8,357 (10,618) 57,560
-------- ---------- ---------- -----------
$910,664 $1,650,956 $1,571,680 $ 800,000
======== ========== ========== ===========
</TABLE>
F-43
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY JUNE 30,
29, 1996 28, 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
Deferred income tax assets:
Allowance for doubtful
accounts................. $ 221,600 $ 187,200 $ 201,660
Inventories............... 222,800 245,600 245,590
Accrued expenses.......... 611,200 577,300 1,213,640
Compensation and benefits. 5,430,000 2,986,600 10,076,080
Other..................... -- -- 473,360
---------- ---------- -----------
Total deferred income
tax assets............. 6,485,600 3,996,700 12,210,330
---------- ---------- -----------
Deferred income tax
liabilities:
Depreciation.............. (2,000) (37,100) (313,580)
State franchise tax....... (163,300) -- (35,300)
Other..................... (24,600) -- (134,000)
---------- ---------- -----------
Total deferred income
tax liabilities........ (189,900) (37,100) (482,880)
---------- ---------- -----------
Net deferred income tax
assets................. $6,295,700 $3,959,600 $11,727,450
========== ========== ===========
</TABLE>
These deferred income tax assets and liabilities are included in the
accompanying consolidated balance sheets under the following captions:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets--current................. $1,338,000 $ 764,500 $ 1,607,450
Deferred tax assets--long-term............... 4,957,700 3,195,100 10,120,000
---------- ---------- -----------
$6,295,700 $3,959,600 $11,727,450
========== ========== ===========
</TABLE>
Management believes it is more likely than not the Company will realize the
benefits of the net deferred tax assets.
12. LEASES
Operating leases for certain facilities and transportation equipment expire
at various dates through 2009. Certain leases contain renewal options.
Approximate minimum future rental payments as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................... $ 2,141,000
1999....................................... 1,705,000
2000....................................... 1,341,000
2001....................................... 1,129,000
2002....................................... 1,018,000
Thereafter................................. 5,569,000
-----------
$12,903,000
===========
</TABLE>
Total rental expense for the years ended February 28, 1995, February 29,
1996 and February 28, 1997 and the four months ended June 30, 1997 was
approximately $1,223,000, $1,970,000, $1,726,000 and $584,000, respectively,
(including $328,000, $445,000, $605,000 and $245,000, respectively, to related
parties).
F-44
<PAGE>
GROUP MAINTENANCE AMERICA CORP. AND SUBSIDIARIES
(FORMERLY AIRTRON, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE BENEFIT PLANS
Airtron maintains a Profit Sharing and Stock Ownership Plan (the Plan).
Substantially all Airtron employees are eligible to participate in the Plan.
Airtron's contribution, as determined by the Board of Directors, is based upon
the participant's gross pay and amounted to approximately $222,000 in fiscal
years ending in 1995, 1996 and 1997 and $74,000 in the four months ended June
30, 1997. In connection with the Agreement (see Note 1) all Airtron shares
held by the Plan were exchanged for cash and preferred and common shares of
Group MAC Parent.
Certain of the Acquired Companies maintain defined contribution plans
covering substantially all employees.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions. It is not possible to
predict the outcome of these matters; however, in the opinion of management,
the disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
15. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
restricted investments (carried at cost or fair value--see Note 4) and long-
term debt. The Company believes that the carrying value of these instruments
on the accompanying balance sheets approximate their fair value.
16. SUBSEQUENT EVENTS
During July 1997, the Company acquired three companies for an aggregate of
approximately $4,088,000 in cash and payables to the former shareholders of
the companies, and 2,150,000 and 304,000 shares of preferred and common stock,
respectively, along with warrants to purchase 514,000 shares of common stock.
The Company financed the cash portion of the purchase consideration through
borrowings under its Credit Agreement. The acquisitions will be accounted for
under the purchase method. Purchase price consideration is subject to final
adjustment. The allocation of purchase price to the assets acquired and
liabilities assumed has been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional
information becomes available.
The Company has signed definitive agreements to acquire 13 companies with
combined annual revenues of approximately $168.7 million for which the
closings will occur simultaneously with an initial public offering expected to
occur in the last quarter of 1997. Such companies provide HVAC, plumbing
and/or electrical services to residential and/or commercial customers. Such
services include both new installations and service, repair and replacement
work.
Subsequent to the independent auditors' report, on August 16, 1997, the
Company's Board of Directors approved a 1-for-2.5 reverse stock split on the
Company's common stock. All share and per share data included in the
consolidated financial statements have been restated to reflect the stock
split.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
MacDonald-Miller Industries, Inc.
We have audited the accompanying consolidated balance sheets of MacDonald-
Miller Industries, Inc. and subsidiaries as of December 31, 1995, 1996 and
June 30, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years ended December
31, 1996, and the six-month period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MacDonald-
Miller Industries, Inc. and subsidiaries as of December 31, 1995 and 1996, and
June 30, 1997, and the results of their operations and cash flows for each of
the three years ended December 31, 1996 and the six-month period ended June
30, 1997 in conformity with generally accepted accounting principles.
Moss Adams LLP
Seattle, Washington
August 7, 1997, except for Notes 2 and 11,
as to which the date
is August 18, 1997
F-46
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -----------
1995 1996 1997
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................... $ -- $ -- $ --
Receivables, less allowance for doubtful
accounts of $145,000, $137,378 and $149,653,
respectively:
Trade....................................... 9,771,993 13,287,714 14,728,290
Related parties and employees............... 108,840 341,186 672,407
Unconsolidated affiliate.................... 279,000 321,000 388,000
Inventories................................... 651,442 713,726 814,093
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 1,356,980 1,342,213 1,015,468
Prepaid expenses.............................. 45,835 117,368 63,403
Income taxes refundable....................... -- 114,396 --
----------- ----------- -----------
Total current assets...................... 12,214,090 16,237,603 17,681,661
PROPERTY AND EQUIPMENT, net..................... 1,159,820 1,436,293 1,555,323
OTHER NONCURRENT ASSETS
Real estate held for investment............... 510,000 508,066 411,066
Other assets.................................. 106,610 145,861 107,523
Deferred income taxes......................... 148,000 105,000 196,000
----------- ----------- -----------
764,610 758,927 714,589
----------- ----------- -----------
Total assets.............................. $14,138,520 $18,432,823 $19,951,573
=========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt.......... $ 100,136 $ 96,000 $ 96,000
Accounts payable.............................. 4,525,382 5,148,905 5,241,881
Notes payable:
Bank........................................ 2,199,134 5,395,816 4,790,113
Shareholders and related parties............ 673,523 30,000 35,340
Accrued expenses.............................. 1,915,968 1,840,699 2,416,748
Income taxes payable.......................... 28,764 -- 396,001
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 1,076,700 1,660,159 1,715,783
----------- ----------- -----------
Total current liabilities................. 10,519,607 14,171,579 14,691,866
LONG-TERM DEBT, net of current maturities....... 699,098 758,149 708,285
DEFERRED COMPENSATION........................... 355,085 189,848 189,848
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 150,000 shares
authorized................................... 198,473 291,539 355,133
Retained earnings............................. 2,366,257 3,021,708 4,006,441
----------- ----------- -----------
Total shareholders' equity................ 2,564,730 3,313,247 4,361,574
----------- ----------- -----------
Total liabilities and shareholders'
equity................................... $14,138,520 $18,432,823 $19,951,573
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $39,534,230 $45,508,339 $66,058,958 $36,382,305 $38,835,662
COST OF SERVICES........ 32,256,651 36,927,012 56,372,933 31,590,195 33,451,024
----------- ----------- ----------- ----------- -----------
Gross profit........ 7,277,579 8,581,327 9,686,025 4,792,110 5,384,638
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 6,088,076 7,338,381 7,631,851 3,705,694 3,787,822
----------- ----------- ----------- ----------- -----------
Income from
operations......... 1,189,503 1,242,946 2,054,174 1,086,416 1,596,816
OTHER INCOME (EXPENSE):
Interest expense...... (275,490) (370,603) (519,842) (244,135) (214,381)
Other................. (25,865) (42,527) 7,926 66,751 167,209
----------- ----------- ----------- ----------- -----------
(301,355) (413,130) (511,916) (177,384) (47,172)
Income before income
tax provision...... 888,148 829,816 1,542,258 909,032 1,549,644
INCOME TAX PROVISION.... 325,730 344,238 574,000 347,059 569,001
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 562,418 $ 485,578 $ 968,258 $ 561,973 $ 980,643
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER
OF COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993.......... 102,603 $117,535 $2,527,242 $2,644,777
Issuance of common stock.......... 2,777 55,540 -- 55,540
Purchase and retirement of common
stock............................ (2,834) (79,919) -- (79,919)
Effects of adjustments related to
unconsolidated affiliate......... -- -- (738,816) (738,816)
Net income........................ -- -- 562,418 562,418
------- -------- ---------- ----------
BALANCE, December 31, 1994.......... 102,546 93,156 2,350,844 2,444,000
Issuance of common stock.......... 4,802 108,514 -- 108,514
Purchase and retirement of common
stock............................ (100) (3,197) -- (3,197)
Effects of adjustments related to
unconsolidated affiliate......... -- -- (470,165) (470,165)
Net income........................ -- -- 485,578 485,578
------- -------- ---------- ----------
BALANCE, December 31, 1995.......... 107,248 198,473 2,366,257 2,564,730
Issuance of common stock.......... 3,977 93,066 -- 93,066
Effects of adjustments related to
unconsolidated affiliate......... -- -- (312,807) (312,807)
Net income........................ -- -- 968,258 968,258
------- -------- ---------- ----------
BALANCE, December 31, 1996.......... 111,225 291,539 3,021,708 3,313,247
Issuance of common stock.......... 1,800 63,594 -- 63,594
Effects of adjustments related to
unconsolidated affiliate......... -- -- 4,090 4,090
Net income........................ -- -- 980,643 980,643
------- -------- ---------- ----------
BALANCE, June 30, 1997.............. 113,025 $355,133 $4,006,441 $4,361,574
======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 562,418 $ 485,578 $ 968,258 $ 561,973 $ 980,643
Adjustments to
reconcile net income
to cash flows from
operating activities:
Depreciation and
amortization.......... 250,162 266,763 376,391 167,654 210,208
(Gain) loss on
disposal of property
and equipment......... (7,897) 8,623 18,857 -- 24,294
Allowance for loss on
real estate held for
investment............ -- -- 25,000 25,000 97,000
Deferred income taxes.. (9,000) (67,000) 43,000 (81,000) (91,000)
Changes in operating
assets and
liabilities:
(Increase) decrease
in:
Trade receivables.... (46,296) (2,700,456) (3,515,721) (1,181,851) (1,440,576)
Receivables from
related parties and
employees........... (141,194) 32,354 (232,346) 7,226 (331,221)
Receivable from
unconsolidated
affiliate........... (176,000) (103,000) (42,000) (21,000) (67,000)
Inventories.......... (76,019) 66,366 (62,284) (310,598) (100,367)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts........... 41,276 (325,574) 14,767 (1,038,698) 326,745
Prepaid expenses..... 51,746 1,525 (71,533) (106,776) 53,965
Income taxes
refundable.......... -- -- (114,396) (154,537) 114,396
Other assets......... 57,860 (43,860) (39,251) (145,625) 38,338
Increase (decrease)
in:
Accounts payable..... (105,101) 906,917 83,013 (652,636) 691,425
Accrued expenses..... 446,596 353,195 (75,269) 551,774 576,049
Income taxes payable. (216,105) 25,894 (28,764) (28,764) 396,001
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts........... (159,552) 649,570 583,459 643,626 55,624
Deferred
compensation........ -- 355,085 (165,237) -- --
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 472,894 (88,020) (2,234,056) (1,764,232) 1,534,524
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (452,306) (654,940) (686,586) (534,042) (365,461)
Proceeds from sale of
property and
equipment............. 9,975 73,841 14,865 -- 11,929
Additions to real
estate held for
investment............ -- (510,000) (23,066) (21,289) --
--------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (442,331) (1,091,099) (694,787) (555,331) (353,532)
--------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Disbursements in
transit............... -- 198,590 540,510 1,338,474 (598,449)
Increase (decrease) of
notes payable to bank,
net................... 895,548 394,297 3,196,682 1,331,530 (605,703)
Effect of adjustment
related to
unconsolidated
affiliate............. (738,816) (470,165) (312,807) (345,641) 4,090
Proceeds from notes
payable to related
parties............... 239,613 673,523 55,000 69,452 30,340
Payments of notes
payable to related
parties............... (288,454) (231,268) (698,523) (20,000) (25,000)
Proceeds from long-term
borrowings............ -- 816,932 312,021 -- --
Payments of long-term
debt.................. (99,457) (331,050) (257,106) (91,778) (49,864)
Proceeds from issuance
of common stock....... 55,540 108,514 93,066 37,526 63,594
Purchase and retirement
of common stock....... (79,919) (3,197) -- -- --
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. (15,945) 1,156,176 2,928,843 2,319,563 (1,180,992)
--------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 14,618 (22,943) -- -- --
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 8,325 22,943 -- -- --
--------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 22,943 $ -- $ -- $ -- $ --
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MacDonald-Miller Industries, Inc. (the Company) (MMI), a Washington
corporation, is a mechanical contractor and service company engaged in the
design, installation and maintenance of heating, ventilating, air
conditioning, plumbing, refrigeration, and automated control systems for
commercial and industrial properties. The main areas of operation are in the
states of Washington and Oregon.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
On August 18, 1997, the Company signed an agreement and plan of merger with
Group Maintenance America Corp. (GroupMAC), whereby GroupMAC will acquire the
Company in a merger transaction for a combination of cash and common shares of
GroupMAC. The merger will close concurrent with the closing of the initial
public offering of the common stock of GroupMAC. Prior to the closing of the
acquisition, the Company will distribute the net assets of MacDonald-Miller
Residential (MMR) (a division of MMI), to its shareholders, in a tax-free
distribution.
The accompanying financial statements exclude MMR, include only the
operations of MMI to be acquired in the merger and have been prepared on the
basis that the distribution of the net assets of MMR had been completed as of
December 31, 1993. Therefore, these financial statements do not include any of
the net assets or operations of MMR for the periods presented which were
included in previously issued financial statements of MMI. Effects of
adjustments related to the unconsolidated affiliate have been shown as a
reduction in shareholders' equity for each of the years presented.
The following provides summary financial information of MMI, including MMR,
as presented in previously issued financial statements:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $42,806,970 $50,371,690 $71,597,840 $38,979,761 $41,972,630
Income from operations.. 816,888 1,007,683 1,238,957 395,035 1,605,945
Net income.............. 322,226 388,738 384,718 113,768 963,965
Total assets............ 15,213,014 19,318,982 20,828,390
Net assets.............. 3,317,211 3,794,995 4,822,554
</TABLE>
MMR is a separate operating entity with separate facilities and management.
Following is a summary of the net assets of MMR as of June 30, 1997 which will
be distributed to shareholders (unaudited):
<TABLE>
<S> <C>
Receivables...................................................... $ 726,675
Inventories...................................................... 230,574
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... 102,038
Property and equipment........................................... 189,649
Other assets..................................................... 15,881
Accounts payable................................................. (230,250)
Accrued expenses................................................. (185,587)
Due to MMI....................................................... (388,000)
---------
Net assets..................................................... $ 460,980
=========
</TABLE>
F-51
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amounts reported as due from affiliate in the accompanying balance sheets
represent the allocation of bank borrowings attributed to MMR and are expected
to be remitted to the Company at the completion of the planned acquisition as
separate financing of the division is established.
The consolidated financial statements include the accounts of MacDonald-
Miller Industries, Inc. and its wholly-owned subsidiaries MacDonald-Miller
Co., Inc. and MacDonald-Miller Service, Inc. (collectively "the Company").
Intercompany balances and transactions are eliminated in consolidation.
Interim Financial Information
The interim financial statements as of June 30, 1996 and for the six months
then ended, are unaudited, and certain information and footnote disclosures
have been omitted. In the opinion of management, all adjustments, consisting
of only normal recurring adjustments, necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations
for the interim periods are not necessarily indicative of the results for the
entire fiscal year.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates used in preparing these financial statements include
estimated costs to complete contracts in progress which have a direct effect
on gross profit.
Revenue Recognition
Revenues from fixed-price and modified fixed-price construction contracts
are recognized on the percentage-of-completion basis using the cost-to-cost
method. This method is used because the Company considers contract costs to be
the best available measure of progress on these contracts. Revenues from cost-
plus-fee contracts are recognized on the basis of costs incurred during the
period plus the fee earned, measured by the same method. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and revenues and are recognized in the period in which the revisions are
determined.
Inventories
Inventories consist of parts and supplies used in the Company's operations.
The inventories are valued at the lower of cost (determined using the first-
in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
straight-line and accelerated methods over the useful life of the assets.
Leasehold improvements are amortized over the life of the related lease.
Disbursements in Transit
Under the Company's cash management system, checks issued, but not presented
to the bank frequently result in overdraft balances for financial accounting
purposes. These balances are classified as accounts payable in the balance
sheets and as a financing activity in the statements of cash flows.
F-52
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
The Company warrants labor for one year on new construction and 90 days
after servicing of air conditioning and heating units. A reserve for warranty
costs is recorded upon completion of installation or services.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123). The new standard measures compensation cost using a fair value
method, which computes compensation cost as the difference between the
options' fair value and the option price on the grant date. However, SFAS No.
123 allows companies to continue to measure compensation cost using the
intrinsic value method, which computes compensation cost as the difference
between a company's stock price and the option price at the grant date. The
Company has elected to continue to use the intrinsic value method.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities at the applicable
enacted tax rates. Income taxes are explained further in Note 9.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
billed receivables, loans, short-term debt (a revolving line of credit with a
variable interest rate) and long-term debt. The carrying value of these
instruments approximate fair value.
Asset Impairment
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
Reclassifications
Certain amounts in the financial statements for 1994 and 1995 have been
reclassified to conform with the 1996 presentation. These changes had no
effect on operating results.
F-53
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. CONTRACTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Contracts receivable
Completed contracts..................... $ 3,257 $ 511,903 $ 767,621
Contracts in progress................... 7,065,294 9,843,152 11,231,253
Retentions.............................. 1,413,742 1,549,731 1,631,527
---------- ----------- -----------
8,482,293 11,904,786 13,630,401
Service and maintenance................... 1,110,384 1,219,618 1,195,211
Other..................................... 324,316 300,688 52,331
---------- ----------- -----------
9,916,993 13,425,092 14,877,943
Less allowance for doubtful accounts...... 145,000 137,378 149,653
---------- ----------- -----------
$9,771,933 $13,287,714 $14,728,290
========== =========== ===========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Costs incurred on uncompleted
contracts........................... $29,427,252 $36,199,700 $32,045,499
Estimated earnings................... 5,377,340 5,029,941 4,227,719
----------- ----------- -----------
34,804,592 41,229,641 36,273,218
Less billings to date................ 34,524,312 41,547,587 36,973,533
----------- ----------- -----------
$ 280,280 $ (317,946) $ (700,315)
=========== =========== ===========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... $ 1,356,980 $ 1,342,213 $ 1,015,468
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... (1,076,700) (1,660,159) (1,715,783)
----------- ----------- -----------
$ 280,280 $ (317,946) $ (700,315)
=========== =========== ===========
</TABLE>
F-54
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL --------------------- JUNE 30,
LIVES 1995 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Machinery and equipment........... 5 years $ 709,983 $ 763,572 $ 887,108
Vehicles.......................... 5 years 188,267 167,810 139,232
Office furniture and equipment.... 7 years 553,565 600,376 608,090
Data processing equipment......... 5 years 736,129 955,399 1,039,165
Communication equipment........... 5 years 90,759 112,419 108,145
Leasehold improvements............ 9 years 179,322 220,432 312,194
---------- ---------- ----------
2,458,025 2,820,008 3,093,934
Less accumulated depreciation..... 1,298,205 1,383,715 1,538,611
---------- ---------- ----------
$1,159,820 $1,436,293 $1,555,323
========== ========== ==========
</TABLE>
6. REAL ESTATE HELD FOR INVESTMENT
During 1995, the Company purchased certain real property which was not
intended to be used in business operations. The property is encumbered with
debt. The debt service payments are calculated using an amortization period of
30 years with interest at 7.88%. Monthly payments, including interest, are
$3,000 with the remaining balance due in full in October 2000. The balances of
the net book value and long-term debt of the real estate held for investment
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Cost basis.................................... $560,000 $583,066 $ 583,066
Loss reserve.................................. (50,000) (75,000) (172,000)
-------- -------- ---------
Net book value.............................. $510,000 $508,066 $ 411,066
======== ======== =========
Long-term debt................................ $401,664 $398,149 $ 396,285
======== ======== =========
</TABLE>
7. NOTE PAYABLE TO BANK
The note payable to bank represents the outstanding balance on a $6,000,000
revolving line of credit with interest at the bank's prime rate plus .75%. The
weighted average interest rate for December 31, 1995, 1996 and June 30, 1997
was 9.83%, 9.15% and 9.27%, respectively. The line of credit is subject to
annual renewal. The note is collateralized by receivables and inventory, and
is guaranteed by the executive officers. The Company is required under the
agreement to maintain certain financial covenants. These financial covenants
include current ratio and tangible net worth requirements, fixed asset
addition restrictions, dividend payment restrictions, and certain restrictions
regarding changes in ownership.
F-55
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Note payable to bank, due in monthly installments
of $8,000 plus interest at prime plus 1%,
collateralized by equipment..................... $352,000 $456,000 $408,000
Note payable, paid in full during 1996........... 45,570 -- --
Note payable related to real estate (see Note 6). 401,664 398,149 396,285
-------- -------- --------
799,234 854,149 804,285
Less current portion............................. 100,136 96,000 96,000
-------- -------- --------
$699,098 $758,149 $708,285
======== ======== ========
</TABLE>
The aggregate maturities of the long-term debt for future years ending June
30 are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 96,000
1999............................................................. 96,000
2000............................................................. 492,285
2001............................................................. 96,000
2002............................................................. 24,000
--------
$804,285
========
</TABLE>
9. INCOME TAXES
The income tax provision consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------- ------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current..................... $334,730 $411,238 $531,000 $428,059 $660,001
Deferred.................... (9,000) (67,000) 43,000 (81,000) (91,000)
-------- -------- -------- -------- --------
$325,730 $344,238 $574,000 $347,059 $569,001
======== ======== ======== ======== ========
</TABLE>
Total income tax expense differs from the amounts computed by applying the
United States statutory income tax rate to income before income tax provision
as a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- ---------------------------
1994 % 1995 % 1996 % 1996 % 1997 %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax provision at
statutory rate......... $301,970 34.0 $282,138 34.0 $524,368 34.0 $309,071 34.0 $526,879 34.0
Increase (reduction) in
income taxes resulting
from:
State income taxes..... 3,200 0.4 2,600 0.3 6,600 0.4 3,300 0.4 10,800 0.7
Meals and
entertainment......... 18,100 2.0 22,800 2.7 23,800 1.5 11,900 1.3 13,600 0.9
Other non-deductible
expenses.............. 2,210 0.2 19,700 2.4 5,600 0.4 5,800 0.6 2,800 0.2
Other.................. 250 -- 17,000 2.0 13,632 0.9 16,988 1.9 14,922 0.9
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
$325,730 36.6 $344,238 41.4 $574,000 37.2 $347,059 38,2 $569,001 36.7
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
F-56
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Warranty reserve............................. $ 44,000 $ 45,000 $ 41,000
Allowance for doubtful accounts.............. 56,000 48,000 51,000
Loss on sale reserve......................... 17,000 26,000 58,000
Deferred Compensation........................ 121,000 65,000 65,000
Other........................................ -- 18,000 60,000
-------- -------- --------
Total deferred income tax assets........... 238,000 202,000 275,000
-------- -------- --------
Deferred tax liabilities:
Contracts in progress........................ (17,000) (36,000) (8,000)
Depreciation................................. (73,000) (61,000) (71,000)
-------- -------- --------
Total deferred income tax liabilities...... (90,000) (97,000) (79,000)
-------- -------- --------
Net deferred income taxes.................. $148,000 $105,000 $196,000
======== ======== ========
</TABLE>
10. ACCRUED LIABILITIES
Accrued liabilities consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Payroll................................. $1,176,450 $1,269,823 $1,718,077
Payroll and business taxes.............. 495,867 309,251 488,115
Other................................... 243,651 261,625 210,556
---------- ---------- ----------
$1,915,968 $1,840,699 $2,416,748
========== ========== ==========
</TABLE>
11. COMMITMENTS
The Company conducts its operation from facilities which are leased from an
affiliated entity. The lease was amended on August 18, 1997 resulting in
increased rental payments which now expire July 2007. The lease modifications
are reflected in the schedule below. The Company also leases vehicles and
facilities from unrelated companies under agreements expiring at various times
through 2001. The Company accounts for these leases as operating leases.
Aggregate minimum annual lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING RELATED
JUNE 30, PARTY OTHER TOTAL
------------ ---------- ---------- ----------
<S> <C> <C> <C>
1998...................................... $ 418,000 $ 511,000 $ 929,000
1999...................................... 475,000 467,000 942,000
2000...................................... 475,000 350,000 825,000
2001...................................... 475,000 211,000 686,000
2002...................................... 475,000 59,000 534,000
Thereafter................................. 2,177,000 -- 2,177,000
---------- ---------- ----------
$4,495,000 $1,598,000 $6,093,000
========== ========== ==========
</TABLE>
F-57
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense under operating leases:
<TABLE>
<CAPTION>
YEARS ENDING RELATED
DECEMBER 31, PARTY OTHER TOTAL
------------ -------- -------- --------
<S> <C> <C> <C>
1994............................................ $380,000 $368,000 $748,000
1995............................................ 380,000 521,000 901,000
1996............................................ 380,000 582,000 962,000
<CAPTION>
PERIOD ENDING
JUNE 30,
-------------
<S> <C> <C> <C>
1996............................................ $190,000 $300,000 $490,000
1997............................................ 190,000 320,000 510,000
</TABLE>
12. RELATED PARTY BALANCES AND TRANSACTIONS
Notes Payable
During 1996, the note payable to shareholder was paid in full, which
included interest payments of $57,000.
Receivables
These balances represent short-term loans granted by the company to
shareholders and employees not incurred in the ordinary course of business.
The receivables are unsecured.
Leases
As further described in Note 11, the Company leases its main plant and
office facilities from the Company's president and principal shareholder.
13. EMPLOYEE BENEFIT PLANS
Pension Plan
The Company contributes monthly to several union-sponsored pension plans for
the benefit of most hourly employees. Such contributions aggregated
approximately $2,162,000, $958,000 and $480,000 in 1996, 1995 and 1994,
respectively, and $1,214,000 and $1,140,520 for the period ending June 30,
1997 and 1996, respectively.
ESOP
The Company has established an employee stock ownership plan (ESOP) which
permits participation by eligible nonunion employees. Contributions are
determined at the discretion of the Board of Directors. ESOP expense amounted
to $87,000, $360,000 and $354,000 in 1996, 1995 and 1994, respectively. There
were no contributions for the periods ending June 30, 1997 and 1996.
Subsequent to the sale of the Company to GroupMAC (see Note 2), the ESOP plan
will be terminated.
401(k)
The Company sponsors a 401(k) salary savings plan for the benefit of all
eligible union and nonunion employees. All contributions to the plan are
elective by the participants. Matching contributions amounted to $27,371,
$29,000 and $26,400 in 1996, 1995 and 1994, respectively, and $88,262 and
$14,430 for the period ending June 30, 1997 and 1996, respectively.
F-58
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
In 1989, several key employees were granted options to purchase 25,000
shares of common stock at fair market value at the date of grant of $20 per
share. The options vest and become exercisable in substantially equal annual
amounts through December 1998. Unexercised options expire one year after
becoming vested or 90 days following termination of employment for reasons
other than death or disability, if earlier. Unexercised options may be
extended to a maximum of two years after becoming vested with the approval of
the Board of Directors.
During 1995, the Company granted options to six employees to purchase 2,000
shares each of common stock at $31.97 per share, the fair market value at the
date of grant. These options are exercisable at the rate of 200 shares
annually through June 2004. During 1997, the Company amended the plan and
granted options to three additional employees to purchase shares of common
stock at $42.05 per share, the fair market value at date of grant.
The following table shows changes in stock options outstanding:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS
-----------------------------
AUTHORIZED GRANTED AVAILABLE PRICE
---------- ------- --------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.......... 80,000 19,469* 52,100 $20.00
Creation of new plan.............. 20,000 -- 20,000
Granted........................... -- 12,000 (12,000) $31.97
Exercised......................... -- (4,702) -- $20 to $26.16
Canceled.......................... -- (975) -- --
------- ------ -------
Balance, December 31, 1995.......... 100,000 25,792* 60,100 $20 to $31.97
Exercised......................... -- (3,977) -- $20 to $31.97
------- ------ -------
Balance, December 31, 1996.......... 100,000 21,815* 60,100 $20 to $31.97
Granted........................... -- 5,000 (5,000) $42.05
Exercised......................... -- (1,800) -- $20 to $42.05
------- ------ -------
Balance, June 30, 1997.............. 100,000 25,015* 55,100 $20 to $42.05
======= ====== =======
</TABLE>
- --------
* At the periods ended, the cumulative number of options vested were as
follows:
<TABLE>
<S> <C>
December 31, 1994................................................... 5,444
December 31, 1995................................................... 5,444
December 31, 1996................................................... 5,444
June 30, 1997....................................................... 2,777
</TABLE>
Upon successful completion of the sale of MMI, all options in the key
employees plan will be vested and exercised. The employee plan will be
eliminated.
Incentive Compensation Plan
During 1995, the Board of Directors established an Incentive Compensation
Plan (ICP) on behalf of executive management. The ICP provides that a portion
of net income, in excess of an established rate of return on equity, be
expensed as incentive compensation. The 1996 and 1995 incentive compensation
expense is $10,000 and $710,000, respectively. There was no expense for the
period ending June 30, 1997 and 1996. The deferred portion at December 31,
1996 and 1995 of $190,000 and $355,000 is payable in future years depending on
operating results of the Company. In the event of operating losses, the
deferred pool will be reduced by the lesser of the operating loss, or the
deferred pool. Participation in the ICP is subject to certain employment and
vesting provisions. The deferred amounts are subordinated to bank and surety
credits.
F-59
<PAGE>
MACDONALD-MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of receivables and costs and earnings in
excess of billings on uncompleted contracts. Concentrations of credit risk
with respect to billed and unbilled receivables are limited due to the large
number of customers comprising the Company's customer base. The Company
generally does not require collateral, but in most cases can place liens
against the property constructed if a default takes place.
15. SIGNIFICANT CUSTOMERS
During the period ending June 30, 1997, the Company had $17,706,000 or 45%
of the periods revenues, and $6,840,000 or 45% of the ending accounts
receivable from two customers. The accounts receivable and revenue represent
four jobs.
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash paid during the year
for:
Income taxes............ $427,105 $370,000 $405,300 $200,000 $150,000
======== ======== ======== ======== ========
Interest................ $275,490 $370,604 $519,842 $244,135 $214,381
======== ======== ======== ======== ========
</TABLE>
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Masters, Inc.
Gaithersburg, Maryland
We have audited the accompanying balance sheets of Masters, Inc. as of
December 31, 1995, December 31, 1996 and June 30, 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 and for the six month period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Masters, Inc., as of December 31, 1995,
December 31, 1996 and June 30, 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996
and for the six month period ended June 30, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
July 24, 1997
F-61
<PAGE>
MASTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
ASSETS ------------ ------------ -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 535,255 $ 670,776 $ 637,330
Accounts receivable, less allowance for
doubtful accounts of $50,000, $99,290
and $257,839, respectively............ 6,257,622 6,859,307 6,859,621
Costs and estimated earnings in excess
of billings on uncompleted contracts.. 1,506,793 1,866,172 1,419,830
Inventories............................ 489,063 588,715 621,912
Prepaid expenses and other assets...... 50,166 48,829 70,818
----------- ----------- -----------
Total current assets................. 8,838,899 10,033,799 9,609,511
PROPERTY AND EQUIPMENT, net.............. 590,229 625,125 609,719
OTHER NONCURRENT ASSETS.................. 673,570 673,570 673,570
----------- ----------- -----------
Total assets......................... $10,102,698 $11,332,494 $10,892,800
=========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current
maturities of long-term debt.......... $ 1,406,634 $ 1,979,616 $ 1,069,777
Accounts payable....................... 1,781,218 1,761,200 2,152,392
Accrued expenses....................... 1,042,627 1,241,727 1,160,127
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 721,159 627,052 850,687
Other current liabilities.............. 406,163 319,904 395,275
----------- ----------- -----------
Total current liabilities............ 5,357,801 5,929,499 5,628,258
LONG-TERM DEBT, net of current
maturities.............................. 827,492 800,238 764,932
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDER'S EQUITY:
Common stock, par value $1 per share;
50,000 shares authorized; 5,100 shares
issued and outstanding................ 5,100 5,100 5,100
Retained earnings...................... 3,912,305 4,597,657 4,494,510
----------- ----------- -----------
Total shareholder's equity........... 3,917,405 4,602,757 4,499,610
----------- ----------- -----------
Total liabilities and shareholder's
equity.............................. $10,102,698 $11,332,494 $10,892,800
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
MASTERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $30,327,333 $35,160,419 $39,825,843 $18,278,841 $19,318,196
COST OF SERVICES........ 28,018,280 31,746,287 35,854,155 16,639,076 17,457,471
----------- ----------- ----------- ----------- -----------
Gross profit.......... 2,309,053 3,414,132 3,971,688 1,639,765 1,860,725
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 1,664,069 2,373,300 2,483,875 1,008,650 1,196,777
----------- ----------- ----------- ----------- -----------
Income from
operations........... 644,984 1,040,832 1,487,813 631,115 663,948
INTEREST EXPENSE........ 86,940 102,428 134,718 58,888 64,672
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 558,044 $ 938,404 $ 1,353,095 $ 572,227 $ 599,276
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
MASTERS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDER'S
STOCK EARNINGS EQUITY
------ ---------- -------------
<S> <C> <C> <C>
BALANCE, January 1, 1994....................... $5,100 $3,125,114 $3,130,214
Net income................................... 558,044 558,044
Dividends paid............................... (219,912) (219,912)
------ ---------- ----------
BALANCE, December 31, 1994..................... 5,100 3,463,246 3,468,346
Net income................................... 938,404 938,404
Dividends paid............................... (489,345) (489,345)
------ ---------- ----------
BALANCE, December 31, 1995..................... 5,100 3,912,305 3,917,405
Net income................................... 1,353,095 1,353,095
Dividends paid............................... (667,743) (667,743)
------ ---------- ----------
BALANCE, December 31, 1996..................... 5,100 4,597,657 4,602,757
Net income................................... 599,276 599,276
Dividends paid............................... (702,423) (702,423)
------ ---------- ----------
BALANCE, June 30, 1997......................... $5,100 $4,494,510 $4,499,610
====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
MASTERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income............. $ 558,044 $ 938,404 $ 1,353,095 $572,227 $ 599,276
Adjustments to recon-
cile net income to net
cash provided by (used
in) operating activi-
ties:
Depreciation........... 227,572 236,131 258,079 144,065 139,740
Loss(Gain) on disposal
of assets............. 20,576 8,480 2,223 -- (305)
Bad debt expense....... 425,602 626,625 434,250 100,000 169,741
Changes in operating
assets and liabili-
ties:
(Increase) decrease
in--
Notes and accounts
receivable.......... (517,095) (1,881,816) (1,035,935) (701,119) (170,055)
Costs and estimated
earnings in excess
of billings on un-
completed contracts. (104,401) (278,186) (359,379) (667,721) 446,342
Inventories.......... 116,978 9,039 (99,652) 31,423 (33,197)
Prepaid expenses and
other assets........ (16,255) (17,607) 1,337 9,945 (21,989)
Increase (decrease)
in--
Accounts payable..... 380,925 120,221 (20,018) 326,793 391,192
Billings in excess of
costs and estimated
earnings on uncom-
pleted contracts.... 43,624 209,499 (94,107) 26,087 223,635
Accrued salaries and
wages............... 2,662 16,042 17,360 58,963 40,363
Accrued profit shar-
ing and bonus....... 143,148 256,752 189,431 (43,433) (162,176)
Accrued vacation ben-
efits............... 53,589 40,105 61,561 29,600 35,858
Payroll taxes and
withholding......... 22,291 (5,665) (69,252) 57,517 4,356
Other current liabil-
ities............... 238,406 80,814 (86,259) (52,484) 75,371
----------- ----------- ----------- -------- -----------
Net cash provided by
(used in) operating ac-
tivities............... 1,595,666 358,838 552,734 (108,137) 1,738,152
----------- ----------- ----------- -------- -----------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of property
and equipment......... (284,326) (1,045,919) (295,198) (169,080) (130,357)
Proceeds from sale of
equipment............. 18,208 566 -- -- 6,327
----------- ----------- ----------- -------- -----------
Net cash used in in-
vesting activities.... (266,118) (1,045,353) (295,198) (169,080) (124,030)
----------- ----------- ----------- -------- -----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from long-term
debt.................. 160,000 1,604,746 659,234 944,234 --
Payments of long-term
debt.................. (1,237,110) (345,617) (113,506) (51,018) (945,145)
Dividends paid......... (219,912) (489,345) (667,743) (567,324) (702,423)
----------- ----------- ----------- -------- -----------
Net cash provided by
(used in) financing
activities............ (1,297,022) 769,784 (122,015) 325,892 (1,647,568)
----------- ----------- ----------- -------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIV-
ALENTS................. 32,526 83,269 135,521 48,675 (33,446)
CASH AND CASH EQUIVA-
LENTS, beginning of pe-
riod................... 419,460 451,986 535,255 535,255 670,776
----------- ----------- ----------- -------- -----------
CASH AND CASH EQUIVA-
LENTS, end of period... $ 451,986 $ 535,255 $ 670,776 $583,930 $ 637,330
=========== =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Masters, Inc. (the Company) is a Mechanical Contractor primarily engaged in
the installation of residential and commercial plumbing, heating, air
conditioning and sprinkler systems within a 100-mile radius of the Washington,
D.C. area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1996 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows
with respect to the interim financial statements, have been included. The
results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from these estimates.
Revenue Recognition
The Company reports revenues from long-term construction contracts in
progress based on the percentage-of-completion method of accounting and,
therefore, takes into account the costs, estimated earnings and revenues to
date on contracts not yet completed.
The amount of revenue recognized at the statement date is the portion of the
total contract price that the cost expended to date bears to the anticipated
final total cost, based on current estimates of the cost to complete. Revenue
recognized is not necessarily related to the progress billings to customers.
As contracts extend over one or more years, revisions in estimates of cost
and earnings during the course of the work are reflected in the accounting
period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated loss is recognized in the financial statements.
Cash and Cash Equivalents
The Company has a cash management system with its bank that provides for the
investment of excess cash balances. The bank transfers the Company's excess
cash balances daily to investments that are under the bank's control. At
December 31, 1995, December 31, 1996 and June 30, 1997, the balances invested
under the cash management system were $1,294,005, $1,198,620 and $1,106,523,
respectively. The Company considers its investments with initial maturities of
less than 90 days to be cash equivalents.
F-66
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist primarily of purchased materials and supplies.
Inventories are stated at the lower of cost or market with cost determined on
a first-in, first-out basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by the
straight-line method based on the estimated useful lives of the assets.
Leasehold improvements are depreciated over the lesser of the remaining lease
term or the estimated useful life of the asset. Expenditures for repairs and
maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments, which extend the useful lives of existing equipment,
are capitalized and depreciated. Upon retirement or disposition of property or
equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the statement of
operations.
Warranty Costs
The Company provides one to two year warranties on their contracts. At
December 31, 1995, December 31, 1996 and June 30, 1997, the Company's warranty
reserve was $80,000, $159,000 and $192,388, respectively.
Income Taxes
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. Accordingly, the current taxable income of the Company is
taxable to the shareholder who is responsible for the payment of taxes
thereon.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
Reclassification
Certain amounts reported in the 1995 and 1996 financial statements have been
reclassified to conform with the June 30, 1997 presentation.
F-67
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Trade accounts receivable.......... $5,337,781 $6,064,444 $5,919,387
Retentions......................... 288,552 226,646 521,686
Shareholder........................ 224,658 238,579 245,539
Service............................ 63,332 50,487 62,057
Trade notes receivable............. 57,672 36,557 25,366
Other.............................. 335,627 341,884 343,425
---------- ---------- ----------
$6,307,622 $6,958,597 $7,117,460
Allowance for sales adjustments and
doubtful accounts................. (50,000) (99,290) (257,839)
---------- ---------- ----------
$6,257,622 $6,859,307 $6,859,621
========== ========== ==========
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<S> <C> <C> <C>
Accrued salaries and wages.............. $ 195,815 $ 213,175 $ 253,538
Accrued profit sharing and bonus........ 415,837 605,268 443,092
Accrued vacation benefits............... 307,523 369,084 404,941
Payroll taxes and withholding........... 123,452 54,200 58,556
---------- ---------- ----------
$1,042,627 $1,241,727 $1,160,127
========== ========== ==========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Costs incurred................. $ 37,064,954 $ 62,376,659 $ 58,243,065
Estimated earnings recognized.. 15,929,952 26,073,509 24,889,245
------------ ------------ ------------
52,994,906 88,450,168 83,132,310
Less billings on contracts..... (52,209,272) (87,211,048) (82,563,167)
------------ ------------ ------------
$ 785,634 $ 1,239,120 $ 569,143
============ ============ ============
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... $ 1,506,793 $ 1,866,172 $ 1,419,830
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... (721,159) (627,052) (850,687)
------------ ------------ ------------
$ 785,634 $ 1,239,120 $ 569,143
============ ============ ============
</TABLE>
F-68
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, DECEMBER 31, JUNE 30,
LIVES 1995 1996 1997
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Leasehold improvements....... 2-7 years $ 215,396 $ 221,265 $ 223,012
Office furniture and
equipment................... 5-10 years 784,498 838,904 858,900
Automotive equipment......... 3-5 years 399,942 435,623 470,864
Construction machinery and
equipment................... 8-10 years 1,003,995 1,132,070 1,174,761
----------- ----------- -----------
2,403,831 2,627,862 2,727,537
Less accumulated
depreciation................ (1,813,602) (2,002,737) (2,117,818)
=========== =========== ===========
$ 590,229 $ 625,125 $ 609,719
=========== =========== ===========
</TABLE>
6. OTHER NONCURRENT ASSETS
During the fourth quarter of 1995, the Company purchased three model homes
from a customer for $673,570 in order to settle certain accounts receivable
balances. The Company is not in the real estate business, and intends to sell
this real estate. Management believes that the carrying value of these homes
approximates their net realizable value based on recent sales in this
development.
The related mortgage note totaling $630,462, $619,627 and $612,915 as of
December 31, 1995, December 31, 1996 and June 30, 1997, respectively, matures
October 5, 2000, and is payable in monthly installments of $5,843 including
principal and interest at 9.25%. The operating results of the investment are
not significant.
Maturities of the mortgage note are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998........................................................... $ 14,159
1999........................................................... 15,525
2000........................................................... 17,024
2001........................................................... 566,207
--------
$612,915
========
</TABLE>
7. SHORT AND LONG-TERM DEBT
The Company has a revolving loan agreement with a bank, which as of December
31, 1995, December 31, 1996 and June 30, 1997, provided for maximum borrowings
of $3,000,000, $3,500,000 and $3,500,000, respectively. The agreement has a
maturity date of September 1, 1997. Borrowings under this agreement at
December 31, 1995, December 31, 1996 and June 30, 1997, amounted to
$1,300,000, $1,890,000 and $1,000,000, respectively, with interest at 8.5
percent at December 31, 1995, 8.25 percent at December 31, 1996 and 8.5
percent at June 30, 1997. All advances under the revolving note are cross-
collateralized with the notes and mortgage payable discussed below. The debt
agreements require among other provisions, the maintenance of certain levels
of net worth and working capital, and place restrictions on cash dividends.
The Company's long term debt for December 31, 1995, December 31, 1996 and
June 30, 1997, was $303,664, $270,227 and $221,794, respectively.
F-69
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
7.75%, due 2/28/97, secured by equipment... $ 44,484 $ 9,198 $ --
8.0%, due 6/25/97, secured by equipment.... 33,582 12,999 --
8.25%, due 11/22/00, secured by equipment.. 200,002 166,431 148,539
-------- -------- --------
Total Notes Payable...................... 278,068 188,628 148,539
-------- -------- --------
Capitalized lease, payable in monthly
installments, interest at 15.35%, due
6/30/00, secured by equipment............. 25,596 21,321 18,928
Capitalized lease, payable in monthly
installments, interest at 9.07%, due
4/30/01, secured by equipment............. $ -- $ 60,278 $ 54,327
-------- -------- --------
Total Capitalized Leases................. 25,596 81,599 73,255
-------- -------- --------
Total long-term debt................... 303,664 270,227 221,794
-------- -------- --------
Less current maturities................ (94,303) (76,095) (55,618)
-------- -------- --------
$209,361 $194,132 $166,176
======== ======== ========
</TABLE>
The aggregate maturities of the long-term debt as of June 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................. $ 37,507
1999............................................................. 40,721
2000............................................................. 44,211
2001............................................................. 26,100
--------
$148,539
========
</TABLE>
Total borrowings under the notes payable with the bank are collateralized by
accounts receivable, inventory, and property and equipment of the Company, the
personal guarantee of the shareholder, and an assignment of the proceeds of a
$2,000,000 life insurance policy on the life of the shareholder.
Future minimum lease payments under capital leases together with the present
value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998........................................................... $25,183
1999........................................................... 25,183
2000........................................................... 25,183
2001........................................................... 12,954
-------
Total minimum lease payments..................................... 88,503
Less: Amount representing interest............................... (15,248)
-------
Present value of net minimum lease payments...................... 73,255
Less: Current Portion............................................ (18,111)
-------
Long-term Portion................................................ $55,144
=======
</TABLE>
Interest paid by Company on short and long-term debt was as follows:
<TABLE>
<S> <C>
Year ending December 31, 1994................................... $106,083
Year ending December 31, 1995................................... 115,031
Year ending December 31, 1996................................... 157,435
Six months ending June 30, 1997................................. 77,445
</TABLE>
F-70
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. LEASES
The Company occupies warehouse and office space which is subject to
operating leases. These leases provide for the following annual rental
payments:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998......................................................... $ 283,558
1999......................................................... 280,881
2000......................................................... 278,094
2001......................................................... 289,008
2002......................................................... 296,522
Thereafter................................................... 165,858
----------
$1,593,921
==========
</TABLE>
Total rent expense was $285,353, $268,419 and $293,074 for the years ended
December 31, 1994, December 31, 1995 and December 31, 1996, respectively. Rent
expense was $140,766 for the six months ended June 30, 1997.
Office furniture and equipment at December 31, 1995, December 31, 1996 and
June 30, 1997, includes $27,500, $96,734 and $96,734, respectively, of
equipment under leases that have been capitalized. Accumulated depreciation
for such equipment was $2,750 at December 31, 1995, $17,940 at December 31,
1996 and $27,613 at June 30, 1997.
9. RELATED PARTY TRANSACTIONS
On January 22, 1997, the Company entered into a partnership with the
shareholder of the Company for the lease of warehouse and office space. The
lease requires an annual base rental of $233,700. The lease extends through
February 1, 2003. Rent increases on each anniversary at the rate of 4%. All
expenses except base period real estate taxes are paid by the Company. Total
rental expense under this lease for the six months ended June 30, 1997, was
$97,375.
The Company leases equipment from a company owned by the shareholder and an
officer of the Company. Expense for this equipment was $210,000, $199,925, and
$207,972, for the years ended December 31, 1994, December 31, 1995 and
December 31, 1996, respectively. Expense for this equipment was $100,803 for
the six months ended June 30, 1997.
The Company makes a monthly payment for advertising to a company owned by
the shareholder of the Company. Payments to this company were $0 for the year
ended December 31, 1994, and approximately $48,000 for each year ending
December 31, 1995 and December 31, 1996. Payments were $24,000 for the six
months ended June 30, 1997.
The Company has an outstanding receivable of $131,633 as of December 31,
1995, December 31, 1996 and June 30, 1997 from a company owned by the
shareholder of the Company.
The shareholder of the Company owes the Company $224,658, $238,579 and
$245,539 in notes receivable as of December 31, 1995, December 31, 1996 and
June 30, 1997, respectively. The balance includes accrued interest at rates
ranging from 7.0% to 8.5% and the notes are payable on demand.
F-71
<PAGE>
MASTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company adopted a qualified Profit-Sharing and 401(k) Retirement Plan in
December 1994. The Plan covers substantially all full time employees. The
401(k) portion of the Plan was effective in January 1995. Contributions are
determined based upon the discretion of the Company's Board of Directors. The
Company contributed $120,500 and $181,915 to the plan for the years ended
December 31, 1995 and December 31, 1996, respectively. A contribution of
$70,292 was made for the six months ended June 30, 1997. A favorable
determination letter dated January 29, 1996, has been obtained from the
Internal Revenue Service.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximate their fair
value.
13. SUBSEQUENT EVENT
In April 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC will acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC, subject to certain conditions including the negotiation of
definitive agreements and approval by Directors of both companies.
* * * * * *
F-72
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
K & N Plumbing, Heating and Air Conditioning, Inc.
We have audited the accompanying balance sheet of K & N Plumbing, Heating
and Air Conditioning, Inc. as of March 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of K & N Plumbing, Heating
and Air Conditioning, Inc. as of March 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
May 20, 1997, except for
note 12, for which the
date is June 1, 1997
F-73
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1997
----------
ASSETS
<S> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance of $98,098....................... $3,410,659
Inventories............................................................ 254,135
Other receivables...................................................... 191,056
Prepaid expenses and other current assets.............................. 155,270
Deferred income taxes.................................................. 109,892
----------
Total current assets................................................. 4,121,012
PROPERTY AND EQUIPMENT, net.............................................. 1,483,869
OTHER NONCURRENT ASSETS.................................................. 20,895
----------
Total assets......................................................... $5,625,776
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt......... $1,285,189
Accounts payable....................................................... 1,399,235
Accrued expenses....................................................... 627,263
Deferred service contract revenue...................................... 27,970
Income taxes payable................................................... 120,187
----------
Total current liabilities............................................ 3,459,844
LONG-TERM DEBT, net of current maturities................................ 305,685
DEFERRED INCOME TAXES.................................................... 252,091
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares authorized;
5,000 shares issued and outstanding................................... 5,000
Retained earnings...................................................... 1,603,156
----------
Total shareholders' equity........................................... 1,608,156
----------
Total liabilities and shareholders' equity........................... $5,625,776
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1997
-----------
<S> <C>
REVENUES........................................................... $24,279,160
COST OF SERVICES................................................... 20,704,965
-----------
Gross profit..................................................... 3,574,195
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 2,638,037
-----------
Income from operations........................................... 936,158
OTHER INCOME (EXPENSE):
Interest expense................................................. (97,390)
Other............................................................ (3,222)
-----------
Income before income tax provision............................. 835,546
INCOME TAX PROVISION............................................... 314,764
-----------
NET INCOME......................................................... $ 520,782
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ ---------- -------------
<S> <C> <C> <C>
BALANCE, March 31, 1996......................... $5,000 $1,082,374 $1,087,374
Net income.................................... -- 520,782 520,782
------ ---------- ----------
BALANCE, March 31, 1997......................... $5,000 $1,603,156 $1,608,156
====== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-76
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
ENDED
MARCH 31,
1997
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 520,782
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation...................................................... 500,679
Loss on sales of property and equipment........................... 10,982
Deferred income taxes............................................. 79,621
Changes in operating assets and liabilities:
(Increase) decrease in--
Accounts receivable............................................. (566,374)
Inventories..................................................... (100,496)
Other receivables............................................... 141,343
Prepaid expenses and other current assets....................... 45,096
Other noncurrent assets......................................... (4,972)
Increase (decrease) in--
Accounts payable................................................ 71,813
Accrued expenses................................................ 11,445
Deferred service contract revenue............................... 27,970
Income taxes payable............................................ 112,851
---------
Net cash provided by operating activities..................... 850,740
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (661,326)
Proceeds from sales of property and equipment...................... 14,442
---------
Net cash used in investing activities......................... (646,884)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Checks outstanding in excess of bank balance....................... (425,718)
Net borrowings on line of credit................................... 66,382
Principal payments on shareholder debt............................. (12,658)
Proceeds from issuance of installment debt......................... 479,093
Principal payments on installment debt............................. (310,955)
---------
Net cash used in financing activities......................... (203,856)
---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ --
CASH AND CASH EQUIVALENTS, beginning of year........................ --
---------
CASH AND CASH EQUIVALENTS, end of year.............................. $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. BUSINESS AND ORGANIZATION
K & N Plumbing, Heating and Air Conditioning, Inc., (the Company) is
primarily engaged in the business of installing plumbing, heating and air
conditioning systems for new single-family detached homes in the areas in and
around Dallas and Austin, Texas and Las Vegas, Nevada. In addition, the
Company is involved in the replacement and repair market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $99,838 and
$114,955, respectively, for the year ended March 31, 1997.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis, using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Inventories
Inventories consist primarily of purchased materials and supplies. The
inventory is valued at the lower of cost or market, with cost determined on a
first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease-term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
F-78
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warranty Costs
The Company warrants labor for one to two years after installation of new
air conditioning and heating units. The Company generally warrants labor for
one year after servicing of existing air conditioning and heating units. A
reserve for warranty costs is recorded upon completion of installation or
service.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consist of the following at March
31, 1997:
<TABLE>
<S> <C>
Prepaid expenses.................................................. $ 94,808
Due from employees................................................ 60,462
--------
$155,270
========
Accrued expenses consist of the following at March 31, 1997:
Accrued payroll and related expense............................... $242,845
Other accrued expenses............................................ 384,418
--------
$627,263
========
</TABLE>
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Machinery and equipment............................. 5--7 years $ 554,461
Service and other vehicles.......................... 5 years 2,239,457
Office equipment, furniture and fixtures............ 5--7 years 290,702
Leasehold improvements.............................. -- 290,875
-----------
3,375,495
Less accumulated depreciation....................... (1,891,626)
-----------
$ 1,483,869
===========
</TABLE>
F-79
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<S> <C>
Credit facility in the amount of $1,000,000 with a bank, bearing
interest at prime plus 1.5%, secured by trade receivables and
inventory....................................................... $ 970,321
Equipment installation loans payable to banks and other financial
institutions, interest varying from 7.5% to 10.24%,
collateralized by certain equipment, payable in monthly
installments including interest, final installment due January
1998............................................................ 620,553
----------
Total short- and long-term debt.............................. 1,590,874
Less short-term borrowings and current maturities............... (1,285,189)
----------
$ 305,685
==========
</TABLE>
The Company had a revolving credit agreement with a bank to provide
borrowings up to $1,000,000. The agreement expires on August 30, 1997. The
revolving credit agreement was collateralized by accounts receivable,
inventories and the personal guarantee of the shareholder. The agreement
contained certain covenants with regard to minimum net worth and lending
limits of up to 80% of accounts receivable less than 60 days old. Borrowings
under the agreement in effect on March 31, 1997, bear interest at 10.0%, which
represents prime plus 1.5%. Borrowings outstanding at March 31, 1997 were
$970,321. The agreement was repaid in connection with the Company's
acquisition, see note 12.
The aggregate maturities of the short- and long-term debt as of March 31,
1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $1,285,189
1999............................................................... 246,605
2000............................................................... 59,080
----------
$1,590,874
==========
</TABLE>
6. INCOME TAXES
Income tax expense for the year ended March 31, 1997 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
Federal............................................ $216,077 $73,166 $289,243
State.............................................. 19,066 6,455 25,521
-------- ------- --------
$235,143 $79,621 $314,764
======== ======= ========
</TABLE>
Total income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision as a result of the following:
<TABLE>
<S> <C>
Tax provision at statutory rate...................................... $284,086
Increase resulting from:
State income taxes, net of federal benefit......................... 16,844
Other.............................................................. 13,834
--------
$314,764
========
</TABLE>
F-80
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Warranty reserves.................................................. $ 41,440
Deferred service contract revenues................................. 10,349
Allowance for doubtful accounts.................................... 36,296
Vacation accrual................................................... 21,807
--------
Total deferred income tax asset.................................. 109,892
--------
Deferred income tax liabilities:
Depreciation....................................................... $112,936
Other.............................................................. 139,155
--------
Total deferred income tax liability.............................. 252,091
--------
Net deferred income tax liability................................ $142,199
========
</TABLE>
7. LEASES
The Company incurred rent expenses under operating leases of $137,351 for
the year ended March 31, 1997. Of such amount, $107,760 related to a facility
that is leased by the Company from its shareholder. Under the lease agreement,
the Company is to pay for all maintenance, certain taxes and insurance for the
facility.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of March 31, 1997
are as follows:
<TABLE>
<S> <C>
1998................................................................. $137,760
1999................................................................. 107,760
2000................................................................. 107,760
2001................................................................. 107,760
2002 and thereafter.................................................. 53,880
--------
$514,920
========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary 401(k) profit-sharing plan covering all
employees. Employees may choose to defer up to 15% of their compensation
during the Plan year, not to exceed Internal Revenue Service limitations, by
contributing to the Plan. The Company matches 50% of each employee's
contributions up to a maximum of 5% of the employee's gross earnings.
Contributions made by the Company of $57,400 were charged to operations in the
year ended March 31, 1997.
9. SALES TO SIGNIFICANT CUSTOMERS
During the year ended March 31, 1997, two customers accounted for
approximately 30% of the Company's revenues.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
F-81
<PAGE>
K & N PLUMBING, HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheet approximates their fair
value.
12. SUBSEQUENT EVENT
Effective June 1, 1997, Group Maintenance America Corp. (GroupMAC) acquired
all the outstanding shares of the Company for a combination of cash, preferred
stock and common stock of GroupMAC. All of the preferred shares issued in
connection with the acquisition of the business will be redeemed for cash
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC.
F-82
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
A-ABC Appliance, Inc. and
A-1 Appliance & Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of A-ABC Appliance,
Inc. and A-1 Appliance & Air Conditioning, Inc. (collectively referred to as
the Company) as of December 31, 1996 and May 31, 1997, and the related
combined statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1996 and the five months ended May 31, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of A-ABC Appliance,
Inc. and A-1 Appliance & Air Conditioning, Inc. as of December 31, 1996 and
May 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1996 and the five months ended May 31, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-83
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 760,291 $ 654,324
Accounts receivable.................................. 144,519 217,461
Other receivables.................................... 35,226 --
Inventories.......................................... 570,007 517,587
Due from related parties and employees............... 30,912 162,580
Prepaid expenses..................................... 13,289 57,090
---------- ----------
Total current assets............................... 1,554,244 1,609,042
PROPERTY AND EQUIPMENT, net............................ 905,447 702,310
GOODWILL, net of accumulated amortization of $9,195 and
$9,820, respectively.................................. 50,808 50,183
OTHER NONCURRENT ASSETS................................ 334,372 263,599
---------- ----------
Total assets....................................... $2,844,871 $2,625,134
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ 176,717 $ 168,425
Accounts payable..................................... 265,080 425,196
Accrued expenses..................................... 183,797 213,732
Due to related parties............................... 315,474 342,584
Deferred service contract revenue.................... 196,217 175,134
---------- ----------
Total current liabilities.......................... 1,137,285 1,325,071
LONG-TERM DEBT, net of current maturities.............. 844,549 779,511
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock......................................... 3,300 3,300
Additional paid-in capital........................... 304,140 304,140
Retained earnings.................................... 555,597 213,112
---------- ----------
Total shareholders' equity......................... 863,037 520,552
---------- ----------
Total liabilities and shareholders' equity......... $2,844,871 $2,625,134
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-84
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED MAY 31,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................. $8,546,450 $3,382,901 $3,419,026
COST OF SERVICES.......................... 5,446,934 2,147,150 2,227,471
---------- ---------- ----------
Gross profit............................ 3,099,516 1,235,751 1,191,555
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 2,766,293 1,124,839 996,082
---------- ---------- ----------
Income from operations.................. 333,223 110,912 195,473
OTHER INCOME (EXPENSE):
Interest expense........................ (94,434) (36,628) (34,313)
Interest income......................... 10,653 1,619 3,702
Other................................... 779 (15,130) (7,760)
---------- ---------- ----------
NET INCOME................................ $ 250,221 $ 60,773 $ 157,102
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-85
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $3,300 $304,140 $ 305,376 $ 612,816
Net income......................... -- -- 250,221 250,221
------ -------- --------- ---------
BALANCE, December 31, 1996........... 3,300 304,140 555,597 863,037
Net income......................... -- -- 157,102 157,102
Distributions to shareholders...... -- -- (499,587) (499,587)
------ -------- --------- ---------
BALANCE, May 31, 1997................ $3,300 $304,140 $ 213,112 $ 520,552
====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-86
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED MAY 31,
DECEMBER 31, ---------------------
1996 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 250,221 $ 60,773 $ 157,102
Adjustments to reconcile net income to net
cash
provided by (used in) operating
activities:
Depreciation and amortization........... 318,259 138,454 133,448
Gain from sales of property and
equipment.............................. (18,765) (18,765) --
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable................... (8,567) (194,850) (72,942)
Other receivables..................... (28,778) 1,611 35,226
Inventories........................... 17,073 (31,888) 52,420
Due from related parties and
employees............................ 1,703 6,000 (11,186)
Prepaid expenses...................... 40,965 (16,391) (43,801)
Other noncurrent assets............... (4,952) (4,391) 24,940
Increase (decrease) in--
Accounts payable...................... (33,128) 143,415 160,116
Accrued expenses...................... (120,496) 69,937 29,935
Due to related parties................ (43,945) (359,419) (315,474)
Deferred service contract revenue..... 36,714 94,838 (21,083)
--------- --------- ---------
Net cash provided by (used in)
operating activities............ 406,304 (110,676) 128,701
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (456,877) (277,614) (4,335)
Proceeds from sales of property and
equipment................................ 20,585 20,585 --
--------- --------- ---------
Net cash used in investing
activities.......................... (436,292) (257,029) (4,335)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............. 376,714 376,714 --
Payments of long-term debt................ (135,202) (71,677) (73,330)
Distributions to shareholders............. -- -- (157,003)
--------- --------- ---------
Net cash provided by (used in)
financing activities............ 241,512 305,037 (230,333)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 211,524 (62,668) (105,967)
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 548,767 548,767 760,291
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period... $ 760,291 $ 486,099 $ 654,324
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-87
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
A-ABC Appliance, Inc. (A-ABC) and A-1 Appliance & Air Conditioning, Inc. (A-
1), (collectively referred to as the Company), are under common ownership. As
common control exists among the entities, the financial statements have been
combined for all periods presented. There have been no intercompany
transactions between the entities. A-ABC and A-1 are primarily engaged in the
installation and servicing of heating and air conditioning systems, as well as
home appliances, for residential and light commercial customers in the Dallas,
Texas area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim combined financial statements for the five months ended May 31,
1996 are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the combined interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results of the entire fiscal year.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized upon completion of service. Revenues on service and
maintenance contracts are recognized over the life of the contract.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest were $92,052 and $34,313 for
the year ended December 31, 1996 and the five months ended May 31, 1997,
respectively.
Inventories
Inventories consist primarily of purchased materials and supplies. The
Company uses the first-in, first-out (FIFO) cost method to value its
inventories.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-88
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholders' respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other noncurrent assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ --------
<S> <C> <C>
Covenant not to compete, net of accumulated
amortization of $247,500 and $293,333, respectively... $302,500 $256,667
Other noncurrent assets................................ 31,872 6,932
-------- --------
$334,372 $263,599
======== ========
Accrued expenses consists of the following:
Accrued payroll costs and benefits..................... $100,151 $165,233
Other accrued expenses................................. 83,646 48,499
-------- --------
$183,797 $213,732
======== ========
</TABLE>
F-89
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, MAY 31,
LIVES 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Land.................................. -- $ 15,000 $ --
Buildings and improvements............ 20-30 years 138,958 --
Service and other vehicles............ 4-7 years 1,191,155 1,193,253
Office equipment, furniture and
fixtures............................. 5-10 years 450,086 452,323
Leasehold improvements................ -- 214,691 214,691
----------- -----------
2,009,890 1,860,267
Less accumulated depreciation......... (1,104,443) (1,157,957)
----------- -----------
$ 905,447 $ 702,310
=========== ===========
</TABLE>
5. GOODWILL AND OTHER NONCURRENT ASSETS
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
Other noncurrent assets include a covenant not to compete and deferred
charges related to the "Asset Purchase and Sale Agreement" made between the
Company's shareholders and former owners. The covenant not to compete and
deferred charges are amortized on a straight-line basis for a period of five
years, which is the period of the covenant in the agreement.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------------ ---------
<S> <C> <C>
Equipment installment loans payable to banks and
other financial institutions, interest varying from
8.75% to 9.0%, secured by certain equipment,
payable in monthly and quarterly installments
including interest, final installment
due November 2000.................................. $ 471,554 $ 419,900
Notes payable to the former shareholders of A-1
Appliance & Air Conditioning, Inc. at 8%, payable
in monthly installments of $7,783, including
interest, final installment due November 2004...... 549,712 528,036
---------- ---------
Total long-term debt............................ 1,021,266 947,936
Less current maturities............................. (176,717) (168,425)
---------- ---------
$ 844,549 $ 779,511
========== =========
</TABLE>
F-90
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of the long-term debt as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
A-ABC A-1 COMBINED
-------- -------- ----------
<S> <C> <C> <C>
1997............................................ $ 97,304 $ 79,413 $ 176,717
1998............................................ 101,507 80,613 182,120
1999............................................ 108,743 71,823 180,566
2000............................................ 79,251 66,660 145,911
2001............................................ 23,435 72,477 95,912
Thereafter...................................... -- 240,040 240,040
-------- -------- ----------
$410,240 $611,026 $1,021,266
======== ======== ==========
</TABLE>
7. SHAREHOLDERS' EQUITY
The authorized, issued and outstanding common stock of the Company at
December 31, 1996 and May 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------ COMMON
AUTHORIZED ISSUED OUTSTANDING STOCK
---------- ------- ----------- ------
<S> <C> <C> <C> <C>
A-ABC voting........................... 50 50 50 $ 250
A-ABC non-voting....................... 50 50 50 50
A-1.................................... 300,000 300,000 300,000 3,000
------- ------- ------- ------
Total................................ 300,100 300,100 300,100 $3,300
======= ======= ======= ======
</TABLE>
The voting common stock and non-voting common stock of A-ABC have stated
values of $5 and $1 per share, respectively. The common stock of A-1 has a
stated value of $0.01 per share.
8. LEASES
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
A-ABC A-1 COMBINED
---------- ------- ----------
<S> <C> <C> <C>
1997........................................... $ 99,000 $27,000 $ 126,000
1998........................................... 99,000 27,000 126,000
1999........................................... 99,000 27,000 126,000
2000........................................... 99,000 11,250 110,250
2001........................................... 99,000 -- 99,000
Thereafter..................................... 717,750 -- 717,750
---------- ------- ----------
$1,212,750 $92,250 $1,305,000
========== ======= ==========
</TABLE>
Total rental expense for the year ended December 31, 1996 and the five
months ended May 31, 1997 was $136,200 and $58,200, respectively.
9. RELATED PARTY TRANSACTIONS
The Company leases the office building and warehouse from a shareholder of
A-ABC and A-1. The Company also pays management fees to a company owned by a
shareholder for administrative and operational services. The management
agreement is renewed annually.
F-91
<PAGE>
A-ABC APPLIANCE, INC. AND A-1 APPLIANCE & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In May 1997, the Company sold land and buildings and improvements to a
shareholder for the recorded book value of $120,482. In addition, the Company
declared $342,584 of distributions to shareholders, which were not paid as of
May 31, 1997.
At December 31, 1996 and May 31, 1997, the Company had amounts due to
related parties of $315,474 and $342,584, respectively, and amounts due from
related parties of $23,174 and $145,070, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) plan covering substantially all
employees. Contributions to this plan, determined annually, are at the
discretion of the Board of Directors. Authorized contributions for the year
ended December 31, 1996 and the five months ended May 31, 1997 amounted to
$20,258 and $9,942, respectively.
11. ADVERTISING
The Company expenses advertising costs as incurred. Total advertising
expense for the year ended December 31, 1996 and the five months ended May 31,
1997 amounted to $401,722 and $136,350, respectively, and is included in
selling, general and administrative expenses in the accompanying combined
statements of operations.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
long-term debt. The Company believes that the carrying value of these
instruments on the accompanying combined balance sheets approximates their
fair value.
14. SUBSEQUENT EVENT
Effective June 1, 1997, Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash and
common stock of GroupMAC.
F-92
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Arkansas Mechanical Services, Inc.
and Mechanical Services, Inc.:
We have audited the accompanying combined balance sheets of Arkansas
Mechanical Services, Inc. and Mechanical Services, Inc. (collectively referred
to as the Company) as of December 31, 1996 and June 30, 1997, and the related
combined statements of operations, shareholders' equity and cash flows for the
year ended December 31, 1996 and the six months ended June 30, 1997. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Arkansas
Mechanical Services, Inc. and Mechanical Services, Inc. as of December 31,
1996 and June 30, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1996 and the six months ended June 30, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 25, 1997
F-93
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
ASSETS ------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 124,687 $ 20,123
Accounts receivable................................. 960,574 1,337,571
Inventories......................................... 55,036 75,862
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 52,310 36,203
Due from related parties............................ 21,291 17,553
Prepaid expenses and other current assets........... 8,795 11,508
---------- ----------
Total current assets.............................. 1,222,693 1,498,820
PROPERTY AND EQUIPMENT, net........................... 634,996 632,862
GOODWILL, net of accumulated amortization of $11,265
and $11,922, respectively............................ 14,975 14,318
OTHER NONCURRENT ASSETS............................... 1,217 1,383
---------- ----------
Total assets...................................... $1,873,881 $2,147,383
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 513,157 $ 500,352
Accounts payable.................................... 529,497 725,177
Accrued expenses.................................... 157,811 69,571
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 117,526 99,690
Due to related parties.............................. -- 35,150
---------- ----------
Total current liabilities......................... 1,317,991 1,429,940
LONG-TERM DEBT, net of current maturities............. 205,170 192,645
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock........................................ 26,000 26,000
Retained earnings................................... 371,983 546,061
Treasury stock, at cost............................. (47,263) (47,263)
---------- ----------
Total shareholders' equity........................ 350,720 524,798
---------- ----------
Total liabilities and shareholders' equity........ $1,873,881 $2,147,383
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-94
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................. $6,237,166 $3,460,144 $4,028,775
COST OF SERVICES.......................... 4,773,451 2,663,083 3,168,537
---------- ---------- ----------
Gross profit.......................... 1,463,715 797,061 860,238
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 1,082,470 525,206 583,120
---------- ---------- ----------
Income from operations................ 381,245 271,855 277,118
OTHER INCOME (EXPENSE):
Interest expense........................ (51,408) (22,908) (32,160)
Other................................... 30,104 17,321 2,120
---------- ---------- ----------
NET INCOME................................ $ 359,941 $ 266,268 $ 247,078
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-95
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------- --------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $26,000 $ 252,756 $(47,263) $ 231,493
Net income......................... -- 359,941 -- 359,941
Distributions to shareholders...... -- (240,714) -- (240,714)
------- --------- -------- ---------
BALANCE, December 31, 1996........... 26,000 371,983 (47,263) 350,720
Net income......................... -- 247,078 -- 247,078
Distributions to shareholders...... -- (73,000) -- (73,000)
------- --------- -------- ---------
BALANCE, June 30, 1997............... $26,000 $ 546,061 $(47,263) $ 524,798
======= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-96
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 359,941 $ 266,268 $ 247,078
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization............. 109,624 65,735 89,354
Changes in operating assets and liabili-
ties:
(Increase) decrease in--
Accounts receivable...................... (368,388) (366,932) (376,997)
Inventories.............................. (10,142) (34) (20,826)
Costs and estimated earnings in excess of
billings on uncompleted contracts....... (27,750) (52,223) 16,107
Due from related parties................. 69,661 85,066 3,738
Prepaid expenses and other current as-
sets.................................... (5,009) (20,847) (2,879)
Increase (decrease) in--
Accounts payable......................... 215,954 367,492 195,680
Accrued expenses......................... 43,524 10,842 (88,240)
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 23,641 (71,807) (17,836)
Due to related parties................... (41,609) (41,609) 35,150
--------- --------- ---------
Net cash provided by operating activi-
ties.................................. 369,447 241,951 80,329
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (237,113) (130,895) (86,563)
Proceeds from sales of property and equip-
ment...................................... 15,000 -- --
--------- --------- ---------
Net cash used in investing activities.. (222,113) (130,895) (86,563)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings........ 590,000 440,000 110,000
Payments of short-term borrowings.......... (410,000) (260,000) (100,000)
Proceeds from long-term debt............... 194,326 98,775 37,499
Payments of long-term debt................. (145,389) (39,145) (72,829)
Distributions to shareholders.............. (295,714) (155,000) (73,000)
--------- --------- ---------
Net cash provided by (used in) financ-
ing activities........................ (66,777) 84,630 (98,330)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 80,557 195,686 (104,564)
CASH AND CASH EQUIVALENTS, beginning of pe-
riod....................................... 44,130 44,130 124,687
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.... $ 124,687 $ 239,816 $ 20,123
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-97
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Arkansas Mechanical Services, Inc. (AMS) and Mechanical Services, Inc.
(MSI), (collectively referred to as the Company), are under common ownership.
As common control exists among the entities, the financial statements have
been combined for all periods. All significant intercompany transactions and
balances have been eliminated in combination. The Company is primarily engaged
in the installation and servicing of heating and air conditioning systems for
commercial and industrial customers in Little Rock and Fayetteville, Arkansas
and the surrounding areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim combined financial statements for the six months ended June 30,
1996 are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the combined interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which losses are
determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest were $51,408 and $32,160 for
the year ended December 31, 1996 and the six months ended June 30, 1997.
Inventories
Inventories consist primarily of purchased materials and supplies. The
Company uses the first-in, first-out (FIFO) cost method to value its
inventories.
F-98
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholders' respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Accrued payroll costs and benefits.................. $ 115,949 $63,339
Other accrued expenses.............................. 41,862 6,232
--------- -------
$ 157,811 $69,571
========= =======
</TABLE>
F-99
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Costs incurred.................................. $1,493,806 $2,232,909
Estimated earnings recognized................... 246,687 247,900
---------- ----------
1,740,493 2,480,809
Less billings on contracts...................... 1,805,709 2,544,296
---------- ----------
$ (65,216) $ (63,487)
========== ==========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............... $ 52,310 $ 36,203
Billings in excess of costs and estimated
earnings on uncompleted contracts............... (117,526) (99,690)
--------- --------
$ (65,216) $(63,487)
========= ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, JUNE 30,
LIVES 1996 1997
---------- ------------ ----------
<S> <C> <C> <C>
Service and other vehicles........... 4-7 years $ 654,491 $ 696,871
Machinery and equipment.............. 5-10 years 228,766 233,744
Office equipment, furniture and
fixtures............................ 5-10 years 69,698 98,121
Leasehold improvements............... -- 75,785 86,567
---------- ----------
1,028,740 1,115,303
Less accumulated depreciation........ (393,744) (482,441)
---------- ----------
$ 634,996 $ 632,862
========== ==========
</TABLE>
6. GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
F-100
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Revolving line of credit with a bank with a maximum
amount of $300,000; interest accrues at prime plus
.75% and is payable monthly; secured by accounts
receivable and the personal guarantee of the
shareholders; due on demand.......................... $ 100,000 $ 75,000
Revolving line of credit with a bank with a maximum
amount of $250,000; interest accrues at 10.0% and is
payable monthly; secured by accounts receivable and
the personal guarantee of the shareholders; due on
demand with a maturity date of June 1997............. 180,000 --
Revolving line of credit with a bank with a maximum
amount of $400,000; interest accrues at prime plus
1.5% and is payable monthly; secured by accounts
receivable and the personal guarantee of the
shareholders; due on demand with a maturity date of
February 1998........................................ -- 215,000
Equipment installment notes to a bank; interest
accrued at various rates, payable in monthly
installments, including interest, of $14,256, final
installment due 2001; secured by service and other
vehicles and the personal guarantee of stockholders.. 275,603 259,718
Note payable to a bank; interest accrues at 9.5%;
payable in monthly installments including interest,
of $2,025, final installments, due August 1997;
secured by personal guarantee of the shareholder..... 92,512 83,731
Equipment installment notes to a bank; interest
varying from 7.5% to 10.0%; payable in monthly
installments of various amounts, including interest,
through 2000; secured by service and other vehicles.. 39,366 33,287
Note payable to a company affiliated through common
ownership; interest accrued at 9.0%; payable in
monthly installments, including interest of $981,
final installment due December 1999; unsecured....... 30,846 26,261
--------- ---------
Total short- and long-term debt..................... 718,327 692,997
Less short-term borrowings and current maturities..... (513,157) (500,352)
--------- ---------
$ 205,170 $ 192,645
========= =========
</TABLE>
The aggregate maturities of the short- and long-term debt as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
AMS MSI COMBINED
-------- -------- --------
<S> <C> <C> <C>
1997........................................... $320,107 $193,050 $513,157
1998........................................... 69,749 12,758 82,507
1999........................................... 68,141 10,827 78,968
2000........................................... 40,023 2,723 42,746
2001........................................... 949 -- 949
-------- -------- --------
$498,969 $219,358 $718,327
======== ======== ========
</TABLE>
F-101
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY
The authorized, issued and outstanding common stock of the Company at
December 31, 1996 and June 30, 1997 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------
TREASURY COMMON
AMORTIZED ISSUED OUTSTANDING STOCK STOCK
--------- ------ ----------- -------- -------
<S> <C> <C> <C> <C> <C>
AMS......................... 100,000 6,000 6,000 1,900 $ 6,000
MSI......................... 1,000 400 333 -- 20,000
------- ----- ----- ----- -------
Total..................... 101,000 6,400 6,333 1,900 $26,000
======= ===== ===== ===== =======
</TABLE>
The common stock of AMS has a par value of $1 per share. The common stock of
MSI has a par value of $1 per share, but has a stated value of $60 per share.
MSI must maintain $20,000 in shareholders' equity in order to retain its
contractors license.
9. LEASES
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as December 31, 1996
are as follows:
<TABLE>
<CAPTION>
AMS MSI COMBINED
------- ------ --------
<S> <C> <C> <C>
1997.............................................. $17,608 $6,912 $24,520
1998.............................................. 14,400 2,656 17,056
1999.............................................. 14,400 -- 14,400
------- ------ -------
$46,408 $9,568 $55,976
======= ====== =======
</TABLE>
In addition to the above lease commitments, the Company leases office and
warehouse space under a month-to-month operating lease, with monthly payments
of $3,200. Total rental expense for the year ended December 31, 1996 and the
six months ended June 30, 1997 was $76,409 and $38,421, respectively.
10. RELATED PARTY TRANSACTIONS
The Company rents certain facilities from related parties. Total rent
expense for these facilities for the year ended December 31, 1996 and the six
months ended June 30, 1997 was $75,696 and $29,608, respectively. AMS rents
certain vehicles from a company affiliated through common ownership. Total
rent expense for these vehicles for the year ended December 31, 1996 and the
six months ended June 30, 1997 was $7,300 and $3,300, respectively.
The Company obtains data processing and other services from a company
affiliated through common ownership. The total expense for these services for
the year ended December 31, 1996 and the six months ended June 30, 1997 was
$120,564 and $60,282, respectively.
11. EMPLOYEE BENEFIT PLAN
Non-office employees are participants in a multi-employer defined
contribution plan pursuant to the collective bargaining agreement of the
union. Contributions for the year ended December 31, 1996 and the six months
ended June 30, 1997, were $91,316 and $57,512, respectively.
F-102
<PAGE>
ARKANSAS MECHANICAL SERVICES, INC. AND
MECHANICAL SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying combined balance sheets approximates
their fair value.
14. ACQUISITION OF COMPANY
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC will acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC, subject to certain conditions including the negotiation of
definitive agreements and approval by Directors of both companies.
F-103
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Callahan Roach Products and Publications, Inc.
We have audited the accompanying balance sheet of Callahan Roach Products
and Publications, Inc. as of February 28, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Callahan Roach Products
and Publications, Inc. as of February 28, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 30, 1997
F-104
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, JUNE 30,
1997 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 27,161 $105,939
Accounts receivable................................. 10,104 --
Inventories......................................... 44,567 46,837
-------- --------
Total current assets.............................. 81,832 152,776
PROPERTY AND EQUIPMENT, net........................... 126,374 117,843
-------- --------
Total assets...................................... $208,206 $270,619
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 60,595 $ 60,629
Accounts payable.................................... 76,043 71,427
Accrued expenses.................................... 21,892 18,436
Income taxes payable................................ 2,576 14,407
-------- --------
Total current liabilities......................... 161,106 164,899
LONG-TERM DEBT, net of current maturities............. 24,558 17,607
DEFERRED INCOME TAXES................................. 8,260 8,760
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares
authorized;
1,000 shares issued and outstanding................ 1,000 1,000
Retained earnings................................... 13,282 78,353
-------- --------
Total shareholders' equity........................ 14,282 79,353
-------- --------
Total liabilities and shareholders' equity........ $208,206 $270,619
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED ------------------
FEBRUARY 28, JUNE 30, JUNE 30,
1997 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES....................................... $1,552,708 $639,702 $597,042
COST OF SERVICES............................... 310,816 108,479 130,710
---------- -------- --------
Gross profit................................. 1,241,892 531,223 466,332
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 1,238,075 438,965 379,697
---------- -------- --------
Income from operations....................... 3,817 92,258 86,635
OTHER INCOME (EXPENSES):
Interest expense............................. (9,196) (2,187) (5,197)
Other........................................ (6,497) 9 (1,367)
---------- -------- --------
Income (loss) before income taxes........... (11,876) 90,080 80,071
INCOME TAX PROVISION........................... -- 19,000 15,000
---------- -------- --------
NET INCOME (LOSS).............................. $ (11,876) $ 71,080 $ 65,071
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ -------- -------------
<S> <C> <C> <C>
BALANCE, February 28, 1996....................... $1,000 $ 25,158 $ 26,158
Net loss....................................... -- (11,876) (11,876)
------ -------- --------
BALANCE, February 28, 1997....................... 1,000 13,282 14,282
Net income (unaudited)......................... -- 65,071 65,071
------ -------- --------
BALANCE, June 30, 1997 (unaudited)............... $1,000 $ 78,353 $ 79,353
====== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-107
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED ------------------
FEBRUARY 28, JUNE 30, JUNE 30,
1997 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ (11,876) $ 71,080 $ 65,071
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation....................... 26,587 2,395 17,872
Deferred income taxes.............. -- -- 500
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable.............. (8,890) (9,983) 10,104
Inventories...................... 7,673 8,551 (2,270)
Increase (decrease) in--
Accounts payable................. (4,555) (54,180) (4,616)
Accrued expenses................. 14,051 2,462 (3,456)
Income taxes payable............. (589) 18,858 11,831
--------- -------- --------
Net cash provided by operating
activities..................... 22,401 39,183 95,036
--------- -------- --------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property and equipment.. (103,577) (43,945) (9,341)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on bank
line of credit...................... 35,701 1,535 (443)
Proceeds from long-term debt......... 46,100 28,174 --
Payment on long-term debt............ (11,405) (723) (6,474)
--------- -------- --------
Net cash provided by (used in)
financing activities........... 70,396 28,986 (6,917)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH....... (10,780) 24,224 78,778
CASH AND CASH EQUIVALENTS, beginning
of period............................ 37,941 37,941 27,161
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period............................... $ 27,161 $ 62,165 $105,939
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Callahan Roach Products and Publications, Inc., (the Company) is primarily
engaged in the business of selling marketing products and pricing models to
independent service companies which install and service heating and air
conditioning systems nationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
Interim financial statements as of June 30, 1997 and for the four months
ended June 30, 1996 and 1997, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the financial position,
results of operations and cash flows with respect to the interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Revenues from service contracts are recognized as services are performed.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $9,196 and
$3,123, respectively, for the year ended February 28, 1997.
Inventories
Inventories consists of supplies used in providing the Company's products
and services. The inventory is valued at the lower of cost or market, with
cost determined on a first-in, first-out (FIFO) basis.
Property, Equipment and Depreciation
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
F-109
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective March 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consist of the following at February 28, 1997:
<TABLE>
<S> <C>
Accrued payroll and related expense................................. $14,051
Other accrued expenses.............................................. 7,841
-------
$21,892
=======
</TABLE>
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at February 28, 1997 is as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Furniture and fixtures................................ 3-7 years $179,641
Less accumulated depreciation......................... (53,267)
--------
Property and equipment, net......................... $126,374
========
</TABLE>
4. INCOME TAXES
There is no Federal income tax provision as losses were incurred and a
valuation allowance has been established against future benefits deriving from
the carryforward of these losses. The deferred income tax liability results
primarily from tax depreciation in excess of book depreciation on property and
equipment.
F-110
<PAGE>
CALLAHAN ROACH PRODUCTS AND PUBLICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following at February 28, 1997:
<TABLE>
<S> <C>
Credit facility in the amount of $100,000 with a bank, bearing
interest at 12.75%................................................ $42,584
Equipment loans payable to financial institutions, interest varying
from 12% to 19%, collateralized by certain equipment, payable in
monthly installments including interest,
final installment due February 2000............................... 42,569
-------
85,153
Less short-term borrowings and current maturities.................. (60,595)
-------
$24,558
=======
</TABLE>
The Company has a revolving credit agreement with a bank to provide
borrowings up to $100,000. The revolving credit agreement is collateralized by
the personal guarantees of shareholders. Borrowings under the agreement in
effect on February 28, 1997, bear interest at 12.5%. Borrowings outstanding at
February 28, 1997 were $42,584.
Maturities of short- and long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28,
------------
<S> <C>
1998................................................................ $60,595
1999................................................................ 16,375
2000................................................................ 8,183
-------
$85,153
=======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
7. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
8. SUBSEQUENT EVENT
Effective July 1, 1997, Group Maintenance America Corp. (GroupMAC) acquired
the Company in a merger transaction for a combination of cash, preferred stock
and common stock of GroupMAC. All of the preferred shares issued in connection
with the acquisition of the Company will be redeemed for cash concurrent with
the consummation of the initial public offering of the common stock of
GroupMAC.
F-111
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Central Carolina Air Conditioning Company:
We have audited the accompanying balance sheets of Central Carolina Air
Conditioning Company (the Company) as of October 31, 1996 and June 30, 1997,
and the related statements of operations, shareholders' equity and cash flows
for the year ended October 31, 1996 and the eight months ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Central Carolina Air
Conditioning Company as of October 31, 1996 and June 30, 1997, and the results
of its operations and its cash flows for the year ended October 31, 1996 and
the eight months ended June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-112
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 440,289 $ 457,132
Accounts receivable.................................... 627,783 867,913
Inventories............................................ 292,215 246,225
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 113,653 168,226
Due from related parties............................... 505,003 175,448
Prepaid expenses and other current assets.............. 240,089 219,149
---------- ----------
Total current assets.................................. 2,219,032 2,134,093
PROPERTY AND EQUIPMENT, net............................. 459,553 674,948
OTHER NONCURRENT ASSETS................................. 37,098 38,498
---------- ----------
Total assets.......................................... $2,715,683 $2,847,539
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-
term debt............................................. $ 64,283 $ 979
Accounts payable....................................... 322,848 274,887
Accrued expenses....................................... 261,300 232,751
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 48,399 39,131
Deferred service contract revenue...................... 755,047 762,821
---------- ----------
Total current liabilities............................. 1,451,877 1,310,569
DEFERRED SERVICE CONTRACT REVENUE....................... 211,397 204,304
DEFERRED COMPENSATION LIABILITY......................... 55,373 60,670
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$10 par value; 2,000 shares authorized,
issued and outstanding................................ 20,000 20,000
Additional paid-in capital............................. 23,140 23,140
Retained earnings...................................... 953,896 1,228,856
---------- ----------
Total shareholders' equity............................ 997,036 1,271,996
---------- ----------
Total liabilities and shareholders' equity............ $2,715,683 $2,847,539
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JUNE 30,
OCTOBER 31, ----------------------
1996 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................... $8,161,356 $5,139,628 $5,463,051
COST OF SERVICES........................... 5,182,045 3,267,848 3,224,802
---------- ---------- ----------
Gross profit............................. 2,979,311 1,871,780 2,238,249
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 2,598,253 1,672,596 1,648,388
---------- ---------- ----------
Income from operations................... 381,058 199,184 589,861
OTHER INCOME (EXPENSE):
Interest expense.......................... (9,841) (6,073) (3,087)
Interest income........................... 30,219 17,611 28,472
Other..................................... (40,166) 13,487 11,233
---------- ---------- ----------
NET INCOME................................. $ 361,270 $ 224,209 $ 626,479
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1995.......... $20,000 $23,140 $ 973,595 $1,016,735
Net income........................ -- -- 361,270 361,270
Distributions to shareholders..... -- -- (380,969) (380,969)
------- ------- ---------- ----------
BALANCE, October 31, 1996.......... 20,000 23,140 953,896 997,036
Net income........................ -- -- 626,479 626,479
Distributions to shareholders..... -- -- (351,519) (351,519)
------- ------- ---------- ----------
BALANCE, June 30, 1997............. $20,000 $23,140 $1,228,856 $1,271,996
======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JUNE 30,
OCTOBER 31, ----------------------
1996 1996 1997
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 361,270 $ 224,209 $ 626,479
Adjustments to reconcile net income to net
cash
provided by (used in) operating
activities:
Depreciation............................. 200,548 140,707 142,535
Gain on sales of property and equipment.. (13,811) (3,344) --
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable.................... (144,095) (243,215) (240,130)
Inventories............................ 6,516 62,058 45,990
Costs and estimated earnings in excess
of billings on uncompleted contracts.. (73,301) (52,611) (54,573)
Due from related parties............... (340,792) (481,044) 329,555
Prepaid expenses and other current
assets................................ (55,800) 91,214 20,940
Other noncurrent assets................ 1,750 1,050 (1,400)
Increase (decrease) in--
Accounts payable....................... 75,239 7,192 (47,961)
Accrued expenses....................... (82,481) (123,859) (28,549)
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 31,913 71,245 (9,268)
Deferred service contract revenue...... 17,670 (31,809) 681
Deferred compensation liability........ 7,945 5,297 5,297
---------- ---------- ---------
Net cash provided by (used in)
operating activities................. (7,429) (332,910) 789,596
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (244,128) (266,117) (357,930)
Proceeds from sales of property and
equipment................................. 25,615 3,344 --
---------- ---------- ---------
Net cash used in investing activities. (218,513) (262,773) (357,930)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short- and long-term debt.... 125,000 125,000 --
Payments of short- and long-term debt...... (120,203) (14,655) (63,304)
Distributions to shareholders.............. (380,969) (196,994) (351,519)
---------- ---------- ---------
Net cash used in financing activities. (376,172) (86,649) (414,823)
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ (602,114) (682,332) 16,843
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 1,042,403 1,042,403 440,289
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of period.... $ 440,289 $ 360,071 $ 457,132
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Central Carolina Air Conditioning Company (the Company) is primarily engaged
in the installation and servicing of heating and air conditioning systems for
residential and commercial customers in the Greensboro and Winston Salem,
North Carolina areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the eight months ended June 30, 1996
are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents. Cash payments for interest were $9,841 and $3,087 for the
year ended October 31, 1996 and the eight months ended June 30, 1997,
respectively.
Inventories
Inventories consist of parts and supplies used mainly in the service portion
of the Company's operation. The inventory is valued at the lower of cost or
market, with cost determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
F-117
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company also offers an extended service
warranty on sales of air conditioning and heating units, for coverage up to
five years after installation. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal and
North Carolina tax purposes as an S Corporation whereby the shareholders'
respective equitable shares in the taxable income of the Company are
reportable on their individual tax returns. The Company makes distributions to
the shareholders' each year at least in amounts necessary to pay personal
income tax payable on the Company's taxable income.
New Accounting Pronouncement
Effective November 1, 1995, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Prepaid expenses....................................... $ 96,620 $ 69,732
Cash value of life insurance........................... 119,331 130,801
Other current assets................................... 24,138 18,616
-------- --------
$240,089 $219,149
======== ========
</TABLE>
Cash value of life insurance represents the cash value of six life insurance
policies.
Accrued expenses consists of the following:
<TABLE>
<S> <C> <C>
Accrued payroll costs and benefits........................ $124,208 $175,831
Accrued bonus and profit sharing.......................... 95,195 --
Other accrued expenses.................................... 41,897 56,920
-------- --------
$261,300 $232,751
======== ========
</TABLE>
F-118
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs incurred......................................... $464,107 $526,315
Estimated earnings recognized.......................... 177,188 269,364
-------- --------
641,295 795,679
Less billings on contracts............................. 576,041 666,584
-------- --------
$ 65,254 $129,095
======== ========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $113,653 $168,226
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (48,399) (39,131)
-------- --------
$ 65,254 $129,095
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
are as follows:
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31, JUNE 30,
USEFUL LIVES 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Service and other vehicles........... 4-7 years $ 1,026,498 $ 1,320,858
Machinery and equipment.............. 5-10 years 203,362 206,399
Office equipment, fixtures and
fixtures............................ 5-10 years 373,146 392,231
Leasehold improvements............... -- 294,877 306,087
----------- -----------
1,897,883 2,225,575
Less accumulated depreciation........ (1,438,330) (1,550,627)
----------- -----------
$ 459,553 $ 674,948
=========== ===========
</TABLE>
F-119
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Revolving line of credit with a bank, with a maximum
amount of $200,000 through February 1, 1997; interest
accrues at prime (8.25% as of October 31, 1996) and
is payable monthly; unpaid principal due on demand... $50,000 $--
Note payable to bank, due in monthly installments of
$1,167, with interest of 8% per annum and secured by
vehicles; matures July 15, 1997...................... 9,998 979
Note payable to bank, due in monthly installments of
$1,093, with interest of 7.25% per annum and secured
by vehicles; matures February 15, 1997............... 4,285 --
------- ----
$64,283 $979
======= ====
</TABLE>
The Company had a revolving line of credit with a bank to provide unsecured
borrowings of up to $200,000. Interest accrued at prime and was payable
monthly. This agreement matured in February 1997. Upon maturity, the Company
obtained another revolving line of credit to provide borrowings of up to
$300,000 with a loan maturity date of March 1, 1998. Other terms of the
agreement were unchanged.
7. LEASES
The Company leases its office building and warehouse from a shareholder
under a 20-year lease terminating in October 2016. The rent is $9,125 for the
first three years and increases by 2.5% at the beginning of the fourth,
seventh, tenth, thirteenth, sixteenth and nineteenth years.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31, 1996
are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 109,500
1998.............................................................. 109,500
1999.............................................................. 109,500
2000.............................................................. 112,238
2001.............................................................. 112,238
Thereafter........................................................ 1,799,369
----------
$2,352,345
==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company leases its office building and warehouse from shareholders of
the Company. For the year ended October 31, 1996 and the eight months ended
June 30, 1997, the Company paid $119,526 and $81,741, respectively, related to
these leases. As of October 31, 1996 and June 30, 1997, the Company has
unsecured advances to various shareholders totaling $444,933 and $136,400,
respectively. In addition, the Company has a mortgage receivable from the
President and shareholder of $60,070 and $39,048 as of October 31, 1996 and
June 30, 1997, respectively. These amounts are included in the amounts due
from related parties in the accompanying balance sheets.
F-120
<PAGE>
CENTRAL CAROLINA AIR CONDITIONING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary 401(k) plan (the Plan) covering its
qualified employees. Employees may choose to defer up to 10% of their
compensation during the Plan year, not to exceed Internal Revenue Service
limitations, by contributing to the Plan. The Company matches 100% of each
employee's contributions up to a maximum of 5% of the employee's gross
earnings. Contributions made by the Company of $18,902 and $10,938 were
charged to operations in the year ended October 31, 1996 and the eight months
ended June 30, 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
12. ACQUISITION OF COMPANY
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC will acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC, subject to certain conditions including the negotiation of
definitive agreements and approval by Directors of both companies.
F-121
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hallmark Air Conditioning, Inc.:
We have audited the accompanying consolidated balance sheets of Hallmark Air
Conditioning, Inc. and subsidiary (the Company) as of February 28, 1997 and
May 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended February 28, 1997 and
the three months ended May 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hallmark
Air Conditioning, Inc. and subsidiary as of February 28, 1997 and May 31,
1997, and the results of their operations and their cash flows for the year
ended February 28, 1997 and the three months ended May 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 11, 1997
F-122
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 203,739 $ 229,466
Accounts receivable, net of allowance for doubtful
accounts of $4,039 and $8,078, respectively......... 139,143 220,122
Inventories.......................................... 359,380 395,684
Due from related parties............................. 43,977 38,140
Deferred income taxes................................ 163,673 160,527
Prepaid expenses and other current assets............ 244,257 184,829
---------- ----------
Total current assets............................... 1,154,169 1,228,768
PROPERTY AND EQUIPMENT, net............................ 224,504 203,424
GOODWILL, net of accumulated amortization of $6,418 and
$8,344, respectively.................................. 109,113 107,187
DUE FROM RELATED PARTIES............................... 29,476 29,476
OTHER NONCURRENT ASSETS................................ 131,990 128,040
---------- ----------
Total assets....................................... $1,649,252 $1,696,895
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-
term debt........................................... $ 46,989 $ 31,896
Current obligations under capital leases............. 69,628 69,628
Accounts payable..................................... 75,655 224,327
Accrued expenses..................................... 146,658 197,154
Deferred service contract revenue.................... 310,927 294,453
---------- ----------
Total current liabilities.......................... 649,857 817,458
LONG-TERM DEBT, net of current maturities.............. 181,570 191,434
OBLIGATIONS UNDER CAPITAL LEASES, net of current
maturities............................................ 54,733 45,440
DEFERRED SERVICE CONTRACT REVENUE...................... 159,708 144,204
DEFERRED INCOME TAXES.................................. 22,429 19,283
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$100 par value; 500 shares authorized;
180 shares issued and outstanding................... 18,000 18,000
Retained earnings.................................... 560,889 459,761
Net unrealized gain on marketable securities......... 2,066 1,315
---------- ----------
Total shareholders' equity......................... 580,955 479,076
---------- ----------
Total liabilities and shareholders' equity......... $1,649,252 $1,696,895
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-123
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31,
FEBRUARY 28, ----------------------
1997 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.......................... $6,516,181 $1,642,422 $1,558,526
COST OF SERVICES.................. 3,461,490 879,293 826,626
---------- ---------- ----------
Gross profit.................... 3,054,691 763,129 731,900
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.......... 3,045,942 676,118 811,982
---------- ---------- ----------
Income (loss) from operations... 8,749 87,011 (80,082)
OTHER INCOME (EXPENSE):
Interest expense................ (30,647) (7,436) (30,135)
Interest income................. 16,106 4,082 11,652
Other........................... 3,227 (11,319) --
---------- ---------- ----------
Income (loss) before income tax
provision..................... (2,565) 72,338 (98,565)
INCOME TAX PROVISION.............. 18,114 12,120 2,563
---------- ---------- ----------
NET INCOME (LOSS)................. $ (20,679) $ 60,218 $ (101,128)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-124
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
COMMON RETAINED MARKETABLE SHAREHOLDERS'
STOCK EARNINGS SECURITIES EQUITY
------- --------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, February 29, 1996......... $18,000 $ 581,568 $ 853 $ 600,421
Net loss......................... -- (20,679) -- (20,679)
Net unrealized gain on marketable
securities...................... -- -- 1,213 1,213
------- --------- ------ ---------
BALANCE, February 28, 1997......... 18,000 560,889 2,066 580,955
Net loss......................... -- (101,128) -- (101,128)
Net unrealized loss on marketable
securities...................... -- -- (751) (751)
------- --------- ------ ---------
BALANCE, May 31, 1997.............. $18,000 $ 459,761 $1,315 $ 479,076
======= ========= ====== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-125
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MAY 31,
FEBRUARY 28, ---------------------
1997 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (20,679) $ 60,218 $(101,128)
Adjustments to reconcile net income (loss)
to net cash
provided by (used in) operating
activities:
Depreciation and amortization........... 171,417 33,426 40,806
Deferred income tax benefit............. (114) -- --
Changes in operating assets and
liabilities, net of effect of
acquisitions accounted for as
purchases:
(Increase) decrease in--
Accounts receivable................... 17,294 (107,706) (80,979)
Inventories........................... (7,915) (70,635) (36,304)
Due from related parties.............. 10,175 46,610 5,837
Prepaid expenses and other current
assets............................... (65,977) 88,660 58,677
Increase (decrease) in--
Accounts payable...................... (21,832) 105,401 148,672
Accrued expenses...................... (105,520) 61,281 50,496
Deferred service contract revenue..... (41,539) 6,911 (31,978)
--------- --------- ---------
Net cash provided by (used in)
operating activities................ (64,690) 224,166 54,099
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through acquisition......... 36,881 36,881 --
Purchases of property and equipment....... (35,742) (12,629) (13,850)
Proceeds from sales of property and
equipment................................ 15,831 -- --
Payment for covenant not to compete....... (130,000) (130,000) --
Proceeds from redemption of marketable
securities, net.......................... 1,663 30,475 --
--------- --------- ---------
Net cash used in investing
activities.......................... (111,367) (75,273) (13,850)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............. 16,010 -- 9,864
Payments of long-term debt................ (23,649) (1,681) (15,093)
Payments of obligations under capital
leases................................... (66,055) -- (9,293)
--------- --------- ---------
Net cash used in financing
activities.......................... (73,694) (1,681) (14,522)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (249,751) (147,212) 25,727
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 453,490 453,490 203,739
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period... $ 203,739 $ 600,702 $ 229,466
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-126
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Hallmark Air Conditioning, Inc. and subsidiary (the Company) is primarily
engaged in the installation and servicing of heating and air conditioning
systems for residential and light commercial customers in Houston and San
Antonio, Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of
Hallmark Air Conditioning, Inc. (Hallmark) and its wholly-owned subsidiary,
Jerry Albert Air Conditioning, Inc. (Jerry Albert). All significant
intercompany balances and transactions have been eliminated in consolidation.
Interim Financial Information
The interim consolidated financial statements for the three months ended May
31, 1996 are unaudited, and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the consolidated interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Revenue is recognized upon completion of service. Revenues on service and
maintenance contracts are recognized over the life of the contract.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $32,261 and
$54,300, respectively, for the year ended February 28, 1997, and $28,310 and
$-0-, respectively, for the three months ended May 31, 1997.
Inventories
Inventories consist primarily of purchased materials and supplies. The
Company uses the first-in, first-out (FIFO) cost method to value its
inventories.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
F-127
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statement of operations.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective March 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Prepaid expenses....................................... $ 36,484 $ 14,313
Cash value of life insurance........................... 131,434 93,387
Marketable securities.................................. 30,015 30,805
Federal income taxes receivable........................ 46,324 46,324
-------- --------
$244,257 $184,829
======== ========
Other noncurrent assets consists of the following:
Covenant not to compete, net of accumulated
amortization of $10,833 and $14,033, respectively..... $119,167 $115,967
Other noncurrent assets................................ 12,823 12,073
-------- --------
$131,990 $128,040
======== ========
Accrued expenses consists of the following:
Accrued payroll costs and benefits..................... $100,330 $147,290
Other accrued expenses................................. 46,328 49,864
-------- --------
$146,658 $197,154
======== ========
</TABLE>
F-128
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED FEBRUARY 28, MAY 31,
USEFUL LIVES 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
Service and other vehicles............ 4-7 years $ 731,913 $ 756,447
Machinery and equipment............... 5-10 years 303,791 265,097
Office equipment, furniture and
fixtures............................. 5-10 years 43,643 43,643
Leasehold improvements................ -- 122,205 122,205
---------- ----------
1,201,552 1,187,392
Less accumulated depreciation......... (977,048) (983,968)
---------- ----------
$ 224,504 $ 203,424
========== ==========
</TABLE>
During the year ended February 28, 1997 and the three months ended May 31,
1997, the Company acquired $74,506 and $31,387, respectively, of property and
equipment in exchange for obligations under capital leases.
5. GOODWILL AND OTHER ASSETS
Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets acquired and is amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows compared to
the carrying value of goodwill. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved.
Other assets include a covenant not to compete related to the acquisition of
Jerry Albert. The covenant not to compete is being amortized on a straight-
line basis over the life of the covenant, which is five years.
6. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Revolving bank line of credit; borrowings not to
exceed $175,000; interest accrues at 8.75% and is
payable monthly; unpaid principal due in October
1997............................................... $ 10,000 $ --
Equipment installment notes to a bank, interest
varying from 8.5% to 9.5%; payable in monthly
installments of various amounts, including
interest, through July 1999; secured by certain
machinery and equipment............................ 28,402 36,596
Note payable to the former shareholder relating to
the purchase of all of the shares of Jerry Albert;
interest accrues at 8.5%; payable in monthly
installments, including interest, of $2,480, final
installment due May 2006........................... 190,157 186,734
-------- --------
Total short- and long-term debt................... 228,559 223,330
Less short-term borrowings and current maturities... (46,989) (31,896)
-------- --------
$181,570 $191,434
======== ========
</TABLE>
F-129
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of short- and long-term debt as of February 28, 1997
are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 46,989
1999................................................................ 33,798
2000................................................................ 31,263
2001................................................................ 29,756
2002................................................................ 29,756
Thereafter.......................................................... 56,997
--------
$228,559
========
</TABLE>
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
FEBRUARY 28, MAY 31,
1997 1997
------------ -------
<S> <C> <C>
Federal:
Current............................................... $ 7,976 $ --
Deferred.............................................. (114) --
State:
Current............................................... 10,252 2,563
Deferred.............................................. -- --
------- ------
$18,114 $2,563
======= ======
</TABLE>
Total income tax expense differs from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to loss before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Benefit at the statutory rate........................ $ (872) $(33,512)
Increase resulting from:
State income taxes, net of federal benefit......... 10,252 2,563
Nondeductible expenses............................. 3,468 1,192
Increase in valuation allowance.................... -- 34,239
Other.............................................. 5,266 (1,919)
------- --------
$18,114 $ 2,563
======= ========
</TABLE>
F-130
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward..................... $ -- $ 31,043
Deferred service contract revenues.................. 133,160 135,757
Accrued customer protection......................... 15,358 13,131
Allowance for doubtful accounts..................... 1,288 2,747
Other............................................... 13,867 12,088
Valuation allowance................................. -- (34,239)
-------- --------
Total deferred income tax asset................... 163,673 160,527
-------- --------
Deferred income tax liabilities:
Depreciation........................................ 19,284 19,283
Other............................................... 3,145 --
-------- --------
Total deferred income tax liability............... 22,429 19,283
-------- --------
Net deferred income tax asset..................... $141,244 $141,244
======== ========
</TABLE>
Management believes it is more likely than not the Company will realize the
benefits of the net deferred income tax asset.
8. LEASES
The Company is obligated under various capital leases, for service and other
vehicles, that expire at various dates through June 2000. At February 28, 1997
and May 31, 1997, the gross amount of property and equipment and related
accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1997
------------ ---------
<S> <C> <C>
Service and other vehicles........................... $ 259,143 $ 290,530
Less accumulated depreciation........................ (127,548) (141,290)
--------- ---------
$ 131,595 $ 149,240
========= =========
</TABLE>
The Company also has several noncancelable operating leases, primarily for
service and other vehicles, that expire over the next three years. These
leases generally contain renewal options for periods ranging from three to
five years and require the Company to pay all executory costs such as
maintenance and insurance. Rental payments include minimum rentals plus
contingent rentals based on mileage. Rental expense for these operating leases
during the year ended February 28, 1997 and the three months ended May 31,
1997 was approximately $18,600 and $5,000, respectively.
F-131
<PAGE>
HALLMARK AIR CONDITIONING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of February 28, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending February 28 or 29,
1998.................................................... $ 69,628 $11,789
1999.................................................... 35,699 59,928
2000.................................................... 19,034 --
-------- -------
Total minimum lease payments............................ 124,361 $71,717
=======
Less current obligations under capital leases............. 69,628
--------
Obligations under capital leases, net................... $ 54,733
========
</TABLE>
The Company leases its primary operations facility from a shareholder and
executive officer of the Company. The lease is for an initial one-year term
expiring in 1997 with an annual renewal thereafter and has been classified as
an operating lease and is included in the data presented above. Total rent
expense associated with this lease for the year ended February 28, 1997 and
the three months ended May 31, 1997 was approximately $96,000 and $24,000,
respectively.
9. EMPLOYEE BENEFIT PLAN
During January 1997, the Company established a contributory 401(k) plan
covering substantially all employees. Contributions to this plan, determined
annually, are at the discretion of the Board of Directors. Authorized
contributions for the year ended February 28, 1997 amounted to $830.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
marketable securities (carried at fair value), and short- and long-term debt.
The Company believes that the carrying value of these instruments on the
accompanying consolidated balance sheets approximates their fair value.
12. ACQUISITION OF JERRY ALBERT
The Company acquired all of the outstanding shares of Jerry Albert on May 1,
1996, in exchange for a $200,000 note payable to the former shareholder of
Jerry Albert. The acquisition was accounted for as a purchase and the
operations of Jerry Albert have been included in the accompanying financial
statements since the date of acquisition. Based upon the relative size of the
acquisition, the related pro forma data is not presented.
13. SUBSEQUENT EVENT
Effective June 1, 1997 Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash,
preferred stock and common stock of GroupMAC. All of the preferred shares
issued in connection with the acquisition of the business will be redeemed for
cash concurrent with the consummation of the initial public offering of the
common stock of GroupMAC.
F-132
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sibley Services, Incorporated:
We have audited the accompanying balance sheets of Sibley Services,
Incorporated (the Company) as of October 31, 1996 and June 30, 1997, and the
related statements of operations, shareholders' equity and cash flows for the
year ended October 31, 1996 and the eight months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sibley Services,
Incorporated as of October 31, 1996 and June 30, 1997, and the results of its
operations and its cash flows for the year ended October 31, 1996 and the
eight months ended June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 25, 1997
F-133
<PAGE>
SIBLEY SERVICES, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 76,034 $ 40,710
Accounts receivable................................... 693,839 635,358
Inventories........................................... 89,649 126,146
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 160,092 55,464
Due from related parties and employees................ 11,170 12,900
Prepaid expenses and other current assets............. 242,851 243,957
---------- ----------
Total current assets................................. 1,273,635 1,114,535
PROPERTY AND EQUIPMENT, net............................ 89,422 86,854
---------- ----------
Total assets......................................... $1,363,057 $1,201,389
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-
term debt............................................ $ 222,591 $ 307,253
Accounts payable...................................... 337,452 226,854
Accrued expenses...................................... 127,036 57,137
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ 3,731 73,479
Deferred service contract revenue..................... 5,463 --
Deferred income taxes................................. 31,474 32,197
---------- ----------
Total current liabilities............................ 727,747 696,920
LONG-TERM DEBT, net of current maturities.............. 82,177 69,115
DEFERRED INCOME TAXES.................................. 9,899 16,668
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value; 1,000 shares authorized;
534 shares issued and outstanding.................... 21,424 21,424
Retained earnings..................................... 626,728 502,180
Treasury stock, 138 shares at cost.................... (104,918) (104,918)
---------- ----------
Total shareholders' equity........................... 543,234 418,686
---------- ----------
Total liabilities and shareholders' equity......... $1,363,057 $1,201,389
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-134
<PAGE>
SIBLEY SERVICES, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JUNE 30,
OCTOBER 31, ----------------------
1996 1996 1997
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................... $6,962,485 $4,945,490 $2,823,468
COST OF SERVICES........................... 5,334,694 3,792,960 2,111,619
---------- ---------- ----------
Gross profit............................. 1,627,791 1,152,530 711,849
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 1,497,773 955,427 846,902
---------- ---------- ----------
Income (loss) from operations............ 130,018 197,103 (135,053)
OTHER INCOME (EXPENSE):
Interest expense.......................... (31,160) (17,755) (15,182)
Other..................................... 15,516 13,547 4,404
---------- ---------- ----------
Income (loss) before income tax
provision............................... 114,374 192,895 (145,831)
INCOME TAX PROVISION....................... 42,030 70,885 (21,283)
---------- ---------- ----------
NET INCOME (LOSS).......................... $ 72,344 $ 122,010 $ (124,548)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE>
SIBLEY SERVICES, INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY SHAREHOLDERS'
STOCK EARNINGS STOCK EQUITY
------- --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, October 31, 1995........... $21,424 $ 554,384 $(104,918) $ 470,890
Net income........................ -- 72,344 -- 72,344
------- --------- --------- ---------
BALANCE, October 31, 1996........... 21,424 626,728 (104,918) 543,234
Net loss.......................... -- (124,548) -- (124,548)
------- --------- --------- ---------
BALANCE, June 30, 1997.............. $21,424 $ 502,180 $(104,918) $ 418,686
======= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE>
SIBLEY SERVICES, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JUNE 30,
OCTOBER 31, --------------------
1996 1996 1997
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 72,344 $ 122,010 $(124,548)
Adjustments to reconcile net income (loss)
to net cash
used in operating activities:
Depreciation and amortization............. 23,899 15,235 16,185
Gain on disposal of property and
equipment................................ (7,090) -- --
Deferred income taxes..................... 21,110 35,442 7,492
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable..................... (38,275) (618,597) 58,481
Inventories............................. (15,047) (54,979) (36,497)
Costs and estimated earnings in excess
of billings on uncompleted contracts... (82,416) (48,664) 104,628
Due from related parties and employees.. 7,551 (21,266) (1,730)
Unbilled job costs...................... 3,350 -- --
Prepaid expenses and other current
assets................................. (121,387) (52,617) (1,106)
Increase (decrease) in--
Accounts payable........................ 62,758 310,318 (110,598)
Accrued expenses........................ (18,964) (78,570) (69,899)
Billings in excess of costs and
estimated earnings on uncompleted
contracts.............................. (61,066) 83,948 69,748
Deferred service contract revenue....... (7,311) (22,771) (5,463)
Income taxes payable.................... (59,089) -- --
--------- --------- ---------
Net cash used in operating activities.. (219,633) (330,511) (93,307)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (20,802) (8,868) (13,617)
Proceeds from sales of property and
equipment.................................. 7,090 -- --
--------- --------- ---------
Net cash used in investing activities.. (13,712) (8,868) (13,617)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit............ 207,000 237,000 81,000
Payment on long-term note payable........... -- -- (9,400)
--------- --------- ---------
Net cash provided by financing
activities............................ 207,000 237,000 71,600
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.... (26,345) (102,379) (35,324)
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 102,379 102,379 76,034
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period..... $ 76,034 $ -- $ 40,710
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Sibley Services, Incorporated (the Company) is primarily engaged in the
installation and servicing of heating and air conditioning systems for
commercial and industrial customers in Memphis, Tennessee and the surrounding
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the eight months ended June 30, 1996
are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest and taxes were $26,004 and
$130,791, respectively, for the year ended October 31, 1996. Cash payments for
interest and taxes were $10,589 and $9,500, respectively, for the eight months
ended June 30, 1997.
Inventories
Inventories consist primarily of purchased materials. The inventory is
valued at the lower of cost or market, with cost determined on a first-in,
first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated life of the asset.
F-138
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
New Accounting Pronouncement
Effective November 1, 1995, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Cash value of life insurance........................... $128,976 $144,012
Prepaid expenses....................................... 64,213 50,713
Refundable income taxes................................ 49,662 42,123
Other.................................................. -- 7,109
-------- --------
$242,851 $243,957
======== ========
</TABLE>
Cash value of life insurance represents the cash value of five life
insurance policies. The Company is the owner and beneficiary of one policy
with a cash value of $21,417 at June 30, 1997 and a face value of $200,000.
There are four split-dollar policies with a cash value totaling $122,595 at
June 30, 1997. The Company also has a contingent receivable of $58,855 on the
four split-dollar policies at June 30, 1997. The contingent receivable is the
difference between the total premiums paid to date and the cash value. Per the
split-dollar agreement the Company will be reimbursed for 100% of the premiums
paid upon the death of the insured.
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Accrued payroll and related expenses.................... $ 94,670 $14,026
Other accrued expenses.................................. 32,366 43,111
-------- -------
$127,036 $57,137
======== =======
</TABLE>
F-139
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs incurred........................................ $222,130 $475,756
Estimated earnings recognized......................... 90,036 124,870
-------- --------
312,166 600,626
Less billings on contracts............................ 155,805 618,641
-------- --------
$156,361 $(18,015)
======== ========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $160,092 $ 55,464
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (3,731) (73,479)
-------- --------
$156,361 $(18,015)
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL OCTOBER 31, JUNE 30,
LIVES 1996 1997
---------- ----------- ---------
<S> <C> <C> <C>
Service and other vehicles................. 4-7 years $ 81,742 $ 85,047
Machinery and equipment.................... 5-10 years 123,864 126,105
Office equipment, furniture and fixtures... 3-10 years 211,773 216,554
Leasehold improvements..................... -- 121,312 124,602
--------- ---------
538,691 552,308
Less accumulated depreciation.............. (449,269) (465,454)
--------- ---------
Property and equipment, net.............. $ 89,422 $ 86,854
========= =========
</TABLE>
6. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Credit facility in the amount of $500,000 with a bank,
bearing interest at prime plus 1% (9.5% as of June
30, 1997), secured by trade receivables and inventory. $207,000 $288,000
Note payable to shareholder with original face amount
of $125,000, noninterest-bearing, discounted at 4.81%,
$481 due weekly, including interest.................. 97,768 88,368
-------- --------
Total short- and long-term debt..................... 304,768 376,368
Less short-term borrowings and current maturities..... (222,591) (307,253)
-------- --------
$ 82,177 $ 69,115
======== ========
</TABLE>
F-140
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has an available line of credit of $500,000 through July 31,
1997. Advances are due April 30, 1997 and accrue interest at prime plus 1%.
The line of credit is secured by accounts receivable and inventory and the
personal guarantees of certain shareholders. Outstanding on the line of credit
as of October 31, 1996 and as of June 30, 1997 was $207,000 and $288,000,
respectively. The line of credit was repaid in connection with the Company's
acquisition, see note 14.
The Company purchased 125 shares of its stock from a shareholder during the
fiscal year ending October 31, 1994. The purchase price was $125,000 payable
at $481 per week, beginning in 1997, for 260 weeks with no interest. The note
is unsecured and has been discounted using an interest rate of 4.81%. Interest
has been accrued through October 31, 1996, in the amount of $14,585.
The aggregate maturities of the short- and long-term debt as of October 31,
1996 are as follows:
<TABLE>
<S> <C>
1997................................................................ $222,591
1998................................................................ 19,552
1999................................................................ 20,513
2000................................................................ 21,521
2001................................................................ 20,591
--------
$304,768
========
</TABLE>
7. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
EIGHT
MONTHS
YEAR ENDED ENDED
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Federal
Current.............................................. $15,961 $(20,000)
Deferred............................................. 17,813 6,620
State
Current.............................................. 4,959 (8,775)
Deferred............................................. 3,297 872
------- --------
$42,030 $(21,283)
======= ========
</TABLE>
Total income tax expense (benefit) differs from the amount computed by
applying the U.S. federal statutory income tax rate of 34% to income (loss)
before income tax provision as a result of the following:
<TABLE>
<CAPTION>
EIGHT
MONTHS
YEAR ENDED ENDED
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Tax provision (benefit) at statutory rate............. $ 38,887 $(49,583)
Increase (decrease) resulting from:
State income taxes, net of federal benefit.......... 5,449 (5,216)
Nondeductible expenses.............................. 7,897 4,798
Tax consequences of graduated rates................. (10,203) 28,718
-------- --------
$ 42,030 $(21,283)
======== ========
</TABLE>
F-141
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax liability are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 30,
1996 1997
----------- --------
<S> <C> <C>
Deferred income tax liabilities:
Uncompleted contracts.................................. $31,474 $32,197
Depreciation........................................... 9,899 16,668
------- -------
Total deferred income tax liability................... $41,373 $48,865
======= =======
</TABLE>
8. LEASES
Operating leases for certain facilities, service and other vehicles and
office equipment expire at various dates through 2000. Certain leases contain
renewal options. Approximate minimum future rental payments as of October 31,
1996 are as follows:
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
1997................................................................ $176,639
1998................................................................ 94,032
1999................................................................ 62,677
2000................................................................ 10,866
--------
$344,214
========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company leased a vehicle, computer equipment, its office and warehouse
from Sibley, Inc. (see note 8). The owner of Sibley, Inc., is related to a
shareholder of Sibley Services, Incorporated For the year ended October 31,
1996 and the eight months ended June 30, 1997 the Company paid $42,490 and
$22,816, respectively, related to these leases.
The Company leased twenty-five vehicles and twenty-two vehicles as of
October 31, 1996 and June 30, 1997, respectively and computer equipment from
JDT Leasing Company (see note 8) which is 100% owned by a shareholder. For the
year ended October 31, 1996 and the eight months ended June 30, 1997 the
Company paid $129,332 and $94,995, respectively, related to these leases.
The Company was owed $5,733 and $10,389 by a shareholder at October 31, 1996
and June 30, 1997, respectively. This receivable represents advances to the
shareholder and is unsecured.
The Company also has a note payable to a former shareholder (see note 6).
10. EMPLOYEE BENEFIT PLANS
The Company has a cafeteria plan for its eligible employees. Benefits under
the plan include medical and dental insurance.
In 1996, the Company established a 401(k) plan for its qualified employees.
Eligibility requires one year of service and age 21 or over. Employees may
elect to defer up to 10% of their compensation. The Company has agreed to
match the employee contribution 100% up to 5% of compensation. Contributions
made by the Company of $53,646 and $36,733 were charged to operations in the
year ended October 31, 1996 and the eight months ended June 30, 1997,
respectively.
F-142
<PAGE>
SIBLEY SERVICES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SALES TO SIGNIFICANT CUSTOMER
Contract revenue billed to one customer amounted to $1,302,289 or 19% of
total sales for the year ended October 31, 1996. At October 31, 1996, amounts
due from this customer included in accounts receivables were $156,885.
12. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
13. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
14. SUBSEQUENT EVENT
Effective July 1, 1997 Group Maintenance America Corp. (GroupMAC) acquired
all of the outstanding shares of the Company for a combination of cash,
preferred stock and common stock of GroupMAC. All of the preferred shares
issued in connection with the acquisition of the business will be redeemed for
cash concurrent with the consummation of the initial public offering of the
common stock of GroupMAC.
F-143
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southeast Mechanical Service, Inc.:
We have audited the accompanying balance sheets of Southeast Mechanical
Service, Inc. as of December 31, 1996 and June 30, 1997, and the related
statements of operations, shareholders' equity and cash flows for the year
ended December 31, 1996 and the six months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southeast Mechanical
Service, Inc. as of December 31, 1996 and June 30, 1997 and the results of its
operations and its cash flows for the year ended December 31, 1996 and the six
months ended June 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-144
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 45,852 $ 74,466
Accounts receivable.................................. 726,944 935,433
Inventories.......................................... 63,530 64,133
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 1,910 1,229
Due from related parties and employees............... 2,268 42,420
Prepaid expenses and other current assets............ 30,471 35,955
---------- ----------
Total current assets............................... 870,975 1,153,636
PROPERTY AND EQUIPMENT, net............................ 498,762 430,188
---------- ----------
Total assets....................................... $1,369,737 $1,583,824
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-
term debt........................................... $ 311,779 $ 135,254
Accounts payable..................................... 94,911 218,453
Accrued expenses..................................... 23,585 136,127
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 24,531 125,317
Due to related parties............................... -- 371,042
---------- ----------
Total current liabilities.......................... 454,806 986,193
LONG-TERM DEBT, net of current maturities.............. 273,403 220,726
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--$1.00 par value; 1,500 shares
authorized, 300 shares issued and outstanding....... 300 300
Additional paid-in capital........................... 5,700 5,700
Retained earnings.................................... 635,528 370,905
---------- ----------
Total shareholders' equity......................... 641,528 376,905
---------- ----------
Total liabilities and shareholders' equity......... $1,369,737 $1,583,824
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-145
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................. $5,281,777 $2,847,310 $2,358,229
COST OF SERVICES.......................... 3,830,398 2,006,815 1,724,977
---------- ---------- ----------
Gross profit............................ 1,451,379 840,495 633,252
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 865,939 388,095 408,957
---------- ---------- ----------
Income from operations.................. 585,440 452,400 224,295
OTHER INCOME (EXPENSE):
Interest expense........................ (54,682) (28,379) (42,905)
Other................................... (15,360) (3,304) 29
---------- ---------- ----------
NET INCOME................................ $ 515,398 $ 420,717 $ 181,419
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-146
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $300 $5,700 $ 440,035 $ 446,035
Net income......................... -- -- 515,398 515,398
Distributions to shareholders...... -- -- (319,905) (319,905)
---- ------ --------- ---------
BALANCE, December 31, 1996........... 300 5,700 635,528 641,528
Net income......................... -- -- 181,419 181,419
Distributions to shareholders...... -- -- (446,042) (446,042)
---- ------ --------- ---------
BALANCE, June 30, 1997............... $300 $5,700 $ 370,905 $ 376,905
==== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ---------------------
1996 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 515,398 $ 420,717 $ 181,419
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 124,074 62,625 74,826
Loss on disposal of property and
equipment.............................. 15,426 1,681 --
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable................... (89,322) (188,594) (208,489)
Inventories........................... -- (1,290) (603)
Costs and estimated earnings in excess
of billings on uncompleted contracts. 23,664 (12,705) 681
Due from related parties and
employees............................ 536 1,949 (40,152)
Prepaid expenses and other current
assets............................... (11,937) (26,155) (5,484)
Increase (decrease) in--
Accounts payable...................... (51,579) 49,418 123,542
Accrued expenses...................... (8,360) 3,542 112,542
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ (11,874) 25,678 100,786
--------- --------- ---------
Net cash provided by operating
activities.......................... 506,026 336,866 339,068
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....... (185,972) (60,537) (6,252)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings and
long-term debt........................... 163,552 120,863 --
Payments of short-term borrowings and
long-term debt........................... (168,518) (68,110) (229,202)
Dividends paid............................ (319,905) (319,905) (75,000)
--------- --------- ---------
Net cash used in financing
activities.......................... (324,871) (267,152) (304,202)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (4,817) 9,177 28,614
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 50,669 50,669 45,852
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period... $ 45,852 $ 59,846 $ 74,466
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Southeast Mechanical Service, Inc. (the Company) is primarily engaged in the
servicing of commercial heating and air conditioning systems in Southeast
Florida including Broward, Dade and Palm Beach Counties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the six months ended June 30, 1996, are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principals, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows
with respect to the interim financial statements, have been included. The
results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents. Cash payments for interest were $16,406 and $27,839 for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
Inventories
Inventories consist of parts and supplies used in the service portion of the
Company's operation. The inventory is valued at the lower of cost or market,
with cost determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-149
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholders' respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Costs incurred...................................... $ 8,013 $ 76,854
Estimated earnings recognized....................... 3,578 56,343
-------- ---------
11,591 133,197
Less billings on contracts.......................... (34,212) (257,285)
-------- ---------
$(22,621) $(124,088)
======== =========
</TABLE>
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ $ 1,910 $ 1,229
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (24,531) (125,317)
-------- ---------
$(22,621) $(124,088)
======== =========
</TABLE>
F-150
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment
are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, JUNE 30,
LIVES 1996 1997
----------- ------------ ----------
<S> <C> <C> <C>
Land................................... -- $ 57,839 $ 57,839
Buildings and improvements............. 20-30 years 273,896 273,896
Service and other vehicles............. 4-7 years 594,809 594,809
Machinery and equipment................ 5-10 years 73,250 73,250
Office equipment, furniture and
fixtures.............................. 5-10 years 161,686 167,938
---------- ----------
1,161,480 1,167,732
Less accumulated depreciation.......... (662,718) (737,544)
---------- ----------
$ 498,762 $ 430,188
========== ==========
</TABLE>
5. SHORT- AND LONG-TERM DEBT
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Note payable to a bank in connection with a working
capital credit line facility. Interest payable
monthly at the bank's prime rate plus .50% (8.75% at
December 31, 1996 and 8.5% at June 30, 1997),
principal amount due in April, 1997. The Company has
an unused portion of this credit line facility
available at December 31, 1996 of $113,000 and
$281,000 at June 30, 1997. This credit line facility
is collateralized by the Company's accounts
receivable, inventory, property and equipment, and
the personal guarantees of the shareholders and
certain spouses..................................... $187,000 $ 19,000
Installment contracts payable at $8,201 per month,
including interest at 7.75% to 9.50%, until October,
1998 and at lesser amounts thereafter until
November, 2000, collateralized by automotive
equipment with a net book value of approximately
$239,000. Balance net of deferred interest of
$32,935 (current portion $17,384)................... 243,810 204,482
Mortgage note payable in monthly installments of
$1,259 plus interest at .50% above the bank's prime
rate (8.75% at December 31, 1996 and 8.5% at June
30, 1997) until January, 2005. The mortgage note is
collateralized by a building and land with a net
book value of approximately $169,000................ 123,350 115,798
Note payable to a bank, payable at $2,387 per month
plus interest at .50% above the bank's prime rate
(8.75% at December 31, 1996 and 8.5% at June 30,
1997) through December, 1997. This note is
collateralized by the Company's accounts receivable,
inventory and certain property and equipment........ 31,022 16,700
-------- --------
Total short- and long-term debt.................. 585,182 355,980
Less short-term borrowings and current maturities.... 311,779 135,254
-------- --------
$273,403 $220,726
======== ========
</TABLE>
F-151
<PAGE>
SOUTHEAST MECHANICAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate maturities of the short- and long-term debt as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997................................................................ $311,779
1998................................................................ 101,137
1999................................................................ 68,009
2000................................................................ 41,326
2001................................................................ 15,104
Thereafter.......................................................... 47,827
--------
$585,182
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996 and the six months ended June 30,
1997, the Company paid consulting fees totaling $71,800 and $10,900,
respectively to various affiliated corporations which are owned by certain of
its shareholders.
Interest expense in connection with shareholder loans repaid during the year
ended December 31, 1996 and the six months ended June 30, 1997 amounted to
$3,680 and $15,066, respectively.
The Company rents storage space on a month-to-month basis from a partnership
owned by its shareholders. Rent expense related to this rental agreement
totaled $4,969 for the year ended December 31, 1996 and $2,461 for the six
months ended June 30, 1997.
The Company's policy is to distribute to the shareholders pass-through
"Chapter S" income in the first month following year end. Such distributions
are made in the form of notes payable which bear interest at 10% and are paid
during the succeeding year. In January 1997, notes totaling $446,042 were
issued to shareholders in accordance with this policy. At June 30, 1997, there
was $371,042 still outstanding on these notes.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
8. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
9. ACQUISITION OF COMPANY
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC will acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC, subject to certain conditions including the negotiation of
definitive agreements and approval by Directors of both companies.
F-152
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Willis Refrigeration, Air Conditioning & Heating, Inc.:
We have audited the accompanying balance sheets of Willis Refrigeration, Air
Conditioning & Heating, Inc. (the Company) as of March 31, 1997 and June 30,
1997, and the related statements of operations, shareholders' equity and cash
flows for the year ended March 31, 1997 and the three months ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Willis Refrigeration, Air
Conditioning & Heating, Inc. as of March 31, 1997 and June 30, 1997, and the
results of its operations and its cash flows for the year ended March 31, 1997
and the three months ended June 30, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 25, 1997
F-153
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 774,445 $ 788,191
Accounts receivable, net of allowance for doubtful
accounts of $564,648 and $539,673, respectively........ 1,288,442 1,390,882
Inventories............................................. 190,276 194,272
Deferred income taxes................................... 240,441 229,950
Prepaid expenses........................................ 12,377 8,873
---------- ----------
Total current assets................................... 2,505,981 2,612,168
PROPERTY AND EQUIPMENT, net.............................. 513,888 512,485
MARKETABLE SECURITIES.................................... 263,175 278,850
OTHER NONCURRENT ASSETS.................................. 80,585 81,538
---------- ----------
Total assets........................................... $3,363,629 $3,485,041
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings................................... $ 222,828 $ 220,731
Accounts payable........................................ 409,302 270,115
Accrued expenses........................................ 86,843 111,099
Deferred service contract revenue....................... 199,194 229,235
Income taxes payable.................................... 230,913 283,747
---------- ----------
Total current liabilities.............................. 1,149,080 1,114,927
DEFERRED INCOME TAXES.................................... 142,005 147,072
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value, stated value of $10 per
share; 500 shares authorized; 405 shares issued and
outstanding............................................ 4,050 4,050
Retained earnings....................................... 1,918,330 2,059,767
Net unrealized gain on marketable securities............ 150,164 159,225
---------- ----------
Total shareholders' equity............................. 2,072,544 2,223,042
---------- ----------
Total liabilities and shareholders' equity............. $3,363,629 $3,485,041
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-154
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30,
MARCH 31, ----------------------
1997 1996 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................... $6,780,747 $1,643,275 $1,743,102
COST OF SERVICES........................... 5,033,377 1,318,762 1,257,766
---------- ---------- ----------
Gross profit............................. 1,747,370 324,513 485,336
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 1,205,393 369,048 275,694
---------- ---------- ----------
Income (loss) from operations............ 541,977 (44,535) 209,642
OTHER INCOME (EXPENSE):
Interest expense.......................... (25,379) (7,343) (4,864)
Interest income........................... 7,926 3,257 10,449
Other..................................... 48,464 9,655 6,353
---------- ---------- ----------
Income (loss) before income tax
provision............................... 572,988 (38,966) 221,580
INCOME TAX PROVISION....................... 237,962 -- 80,143
---------- ---------- ----------
NET INCOME (LOSS).......................... $ 335,026 $ (38,966) $ 141,437
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-155
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
COMMON RETAINED MARKETABLE SHAREHOLDERS'
STOCK EARNINGS SECURITIES EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1996............. $4,050 $1,583,304 $ 77,400 $1,664,754
Net income......................... -- 335,026 -- 335,026
Net unrealized gain on marketable
securities........................ -- -- 72,764 72,764
------ ---------- -------- ----------
BALANCE, March 31, 1997............. 4,050 1,918,330 150,164 2,072,544
Net income......................... -- 141,437 -- 141,437
Net unrealized gain on marketable
securities........................ -- -- 9,061 9,061
------ ---------- -------- ----------
BALANCE, June 30, 1997.............. $4,050 $2,059,767 $159,225 $2,223,042
====== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30,
MARCH 31, ---------------------
1997 1996 1997
---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 335,026 $ (38,966) $ 141,437
Adjustments to reconcile net income (loss)
to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 82,328 22,419 22,591
Deferred income taxes..................... 80,900 -- 8,944
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable..................... (39,157) (332,559) (102,440)
Inventories............................. 21,111 -- (3,996)
Prepaid expenses........................ 41,737 (22,000) 3,504
Increase (decrease) in--
Accounts payable........................ (125,073) 111,473 (139,187)
Accrued expenses........................ (74,603) (48,077) 24,256
Deferred service contract revenue....... 16,154 25,242 30,041
Income taxes payable.................... 46,885 -- 52,834
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. 385,308 (282,468) 37,984
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (34,821) (2,099) (21,188)
Increase in cash surrender value of life
insurance policy........................... (10,943) -- (953)
--------- --------- ---------
Net cash used in investing activities.. (45,764) (2,099) (22,141)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term borrowings........... (84,942) -- (2,097)
--------- --------- ---------
Net cash used in financing activities.. (84,942) -- (2,097)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 254,602 (284,567) 13,746
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 519,843 519,843 774,445
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period..... $ 774,445 $ 235,276 $ 788,191
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Willis Refrigeration, Air Conditioning & Heating, Inc. (the Company) is
primarily engaged in the installation and servicing of heating and air
conditioning systems for residential customers in Ohio and northern Kentucky.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the three months ended June 30, 1996
are unaudited, and certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Use of Estimates
Management uses estimates and assumptions in preparing the financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from new construction sales are recognized on the
percentage of completion basis with seventy percent of the revenue recognized
at initial installation of new units and thirty percent recognized at the
final stage of installation when the residential building is nearing
completion. Material, equipment and labor costs are estimated for each job and
are recognized on the same percentage method.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents. Cash payments for interest were $25,379 and $2,131 for
the year ended March 31, 1997 and the three months ended June 30, 1997.
Inventories
Inventories consist primarily of parts and supplies used in both the service
and construction portions of the Company's operation. Inventory is stated at
the lower of cost or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-158
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Marketable Securities
The Company accounts for marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. All of
the Company's marketable securities (all of which are equity securities) have
been classified as available for sale with unrealized gains or losses recorded
as a separate component of shareholders' equity. As of March 31, 1997 and June
30, 1997 the amortized cost of the marketable securities was $12,900.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or services.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
F-159
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31, JUNE 30,
USEFUL LIVES 1997 1997
------------ ---------- ----------
<S> <C> <C> <C>
Service and other vehicles............. 3-5 years $ 505,103 $ 505,103
Office equipment, furniture and
fixtures.............................. 3-10 years 223,379 244,567
Buildings and improvements............. 18-31 years 453,267 453,267
Land................................... -- 106,500 106,500
---------- ----------
1,288,249 1,309,437
Less accumulated depreciation........ (774,361) (796,952)
---------- ----------
$ 513,888 $ 512,485
========== ==========
</TABLE>
4. OTHER NONCURRENT ASSETS
Other noncurrent assets includes the cash surrender value of a life
insurance policy for the vice president of the Company. The cash surrender
value of the policy is as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
Cash surrender value.................................... $ 82,267 $ 83,220
Outstanding loan........................................ (18,682) (18,682)
-------- --------
Net cash surrender value.............................. $ 63,585 $ 64,538
======== ========
</TABLE>
5. SHORT-TERM BORROWINGS
Short-term borrowings consists of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
Revolving line of credit of up to $700,000 payable to a
financial institution, bearing interest at 8.5%, due
upon demand, but in any event without
demand or notice on February 28, 1998................... $100,000 $100,000
Notes payable to the president of the Company, bearing
interest at 9%,
no scheduled repayment.................................. 122,828 120,731
-------- --------
Total short-term borrowings............................ $222,828 $220,731
======== ========
</TABLE>
6. INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
Current.............................................. $157,062 $71,199
Deferred............................................. 80,900 8,944
-------- -------
Income tax provision............................... $237,962 $80,143
======== =======
</TABLE>
F-160
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Total income tax expense differed from the amount computed by applying the
U.S. federal statutory income tax rate of 34% to income before income tax
provision as a result of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
Expense at the statutory rate........................ $194,816 $75,337
Increase (reduction) resulting from:
State income taxes................................. 45,839 12,289
Other.............................................. (2,693) (7,483)
-------- -------
$237,962 $80,143
======== =======
</TABLE>
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- --------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts......................... $226,249 $215,758
Warranty reserves....................................... 11,252 11,252
Vacation accrual........................................ 2,940 2,940
-------- --------
Total deferred income tax asset....................... 240,441 229,950
-------- --------
Deferred income tax liabilities:
Net unrealized gain on securities available for sale.... 105,115 111,729
Depreciation............................................ 36,890 35,343
-------- --------
Total deferred income tax liability................... 142,005 147,072
-------- --------
Net deferred income tax asset......................... $ 98,436 $ 82,878
======== ========
</TABLE>
Management believes that it is more likely than not that the Company will
realize the benefits of the net deferred income tax asset recorded at March
31, 1997 and June 30, 1997.
7. EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing plan (the Plan) covering its qualified
employees. The Company may make a contribution amount at any time to the Plan
to the extent authorized by the Board of Directors. Total expense related to
this Plan for the year ended March 31, 1997 and the three months ended June
30, 1997, was approximately $54,200 and $3,700, respectively.
8. SALES TO SIGNIFICANT CUSTOMER
During the year ended March 31, 1997 and the three months ended June 30,
1997 sales to one customer accounted for approximately 14% and 13% of the
Company's revenues.
9. EMPLOYMENT AGREEMENT
On January 13, 1992, the Company entered into an employment agreement with
the Company's Chairman of the Board of Directors whereby an annual salary
would be paid to the Chairman through December 31, 2011 and would continue to
be paid in the event of death, disability, or termination of employment. An
annual salary
F-161
<PAGE>
WILLIS REFRIGERATION, AIR CONDITIONING & HEATING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of $26,000 will be paid through August 31, 2006; $15,600 per annum will be
paid thereafter through December 31, 2011. The employment agreement will be
terminated upon the consummation of the proposed merger of the Company (see
note 11).
10. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
marketable securities (carried at fair value) and short-term borrowings. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
11. ACQUISITION OF COMPANY
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC would acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC, subject to certain conditions including the negotiation of
definitive agreements and approval by Directors of both companies.
F-162
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Yale Incorporated
We have audited the accompanying balance sheets of Yale, Inc. as of
September 30, 1996 and June 30, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year ended September
30, 1996 and the nine months ended June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Yale Incorporated as of
September 30, 1996 and June 30, 1997, and the results of its operations and
its cash flows for the year ended September 30, 1996 and the nine months ended
June 30, 1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
July 18, 1997
F-163
<PAGE>
YALE INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 112,091 $ 93,872
Accounts receivable, net of allowance for doubtful
accounts of $5,000................................. 1,355,712 1,553,593
Inventories......................................... 80,563 89,466
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 127,177 295,298
Prepaid expenses.................................... 54,324 44,545
---------- ----------
Total current assets.............................. 1,729,867 2,076,774
PROPERTY AND EQUIPMENT, net........................... 438,665 694,157
---------- ----------
Total assets...................................... $2,168,532 $2,770,931
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of
long-term debt..................................... $ 120,233 $ 244,998
Accounts payable.................................... 529,545 763,695
Accrued expenses.................................... 217,847 219,303
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 93,306 19,401
---------- ----------
Total current liabilities......................... 960,931 1,247,397
LONG-TERM DEBT, net of current maturities............. 101,732 175,047
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock--no par value, stated value of $1 per
share; 20,000 shares authorized; 1,000 shares
issued and outstanding............................. 1,000 1,000
Additional paid-in capital.......................... 100,767 100,767
Retained earnings................................... 1,004,102 1,246,720
---------- ----------
Total shareholders' equity........................ 1,105,869 1,348,487
---------- ----------
Total liabilities and shareholders' equity........ $2,168,532 $2,770,931
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-164
<PAGE>
YALE INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, ----------------------
1996 1996 1997
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................. $10,065,130 $7,228,688 $7,362,875
COST OF SERVICES......................... 7,930,984 5,553,931 5,414,265
----------- ---------- ----------
Gross profit........................... 2,134,146 1,674,757 1,948,610
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 1,729,405 1,292,928 1,522,284
----------- ---------- ----------
Income from operations................. 404,741 381,829 426,326
OTHER INCOME (EXPENSE):
Interest expense....................... (29,578) (23,824) (24,350)
Other.................................. (49,791) (21,383) (9,358)
----------- ---------- ----------
NET INCOME............................... $ 325,372 $ 336,622 $ 392,618
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-165
<PAGE>
YALE INCORPORATED
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1995......... $1,000 $100,767 $ 803,730 $ 905,497
Net income........................ -- -- 325,372 325,372
Distributions to shareholders..... -- -- (125,000) (125,000)
------ -------- ---------- ----------
BALANCE, September 30, 1996......... 1,000 100,767 1,004,102 1,105,869
Net income........................ -- -- 392,618 392,618
Distributions to shareholders..... -- -- (150,000) (150,000)
------ -------- ---------- ----------
BALANCE, June 30, 1997.............. $1,000 $100,767 $1,246,720 $1,348,487
====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-166
<PAGE>
YALE INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, ---------------------
1996 1996 1997
------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 325,372 $ 336,622 $ 392,618
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation........................... 127,448 92,059 141,438
Gain on sale of property and equipment. (660) (660) (11,159)
Changes in operating assets and
liabilities:
(Increase) decrease in--
Accounts receivable.................. 59,098 (149,234) (197,881)
Inventories.......................... 410 (178,651) (8,903)
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................... (93,145) (51,801) (168,121)
Prepaid expenses..................... (25,136) (26,821) 9,779
Increase (decrease) in--
Accounts payable..................... 7,505 456,337 234,150
Accrued expenses..................... 58,688 (52,607) 1,456
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................... 54,294 38,574 (73,905)
--------- --------- ---------
Net cash provided by operating
activities......................... 513,874 463,818 319,472
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (315,074) (315,074) (403,831)
Proceeds from sales of property and
equipment............................... 41,945 41,945 18,060
--------- --------- ---------
Net cash used in investing
activities......................... (273,129) (273,129) (385,771)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............. 233,400 233,400 319,000
Payments of long-term debt............... (253,784) (221,810) (120,920)
Distributions to shareholders............ (125,000) (125,000) (150,000)
--------- --------- ---------
Net cash provided by (used in)
financing activities........... (145,384) (113,410) 48,080
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 95,361 77,279 (18,219)
CASH AND CASH EQUIVALENTS, beginning of
period................................... 16,730 16,730 112,091
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.. $ 112,091 $ 94,009 $ 93,872
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-167
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Yale Incorporated (the Company) is primarily engaged in the installation and
servicing of heating and air conditioning systems for commercial and
industrial customers in the state of Minnesota.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The interim financial statements for the nine months ended June 30, 1996 are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows
with respect to the interim financial statements, have been included. The
results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
Revenue Recognition
Revenues from work orders are recognized as services are performed. Revenues
on service and maintenance contracts are recognized over the life of the
contract. Revenues from construction contracts are recognized on a percentage
of completion basis using the cost-to-cost method. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. Changes in job performance, job conditions, and estimated
profitability may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to be
cash equivalents. Cash payments for interest were $37,791 and $24,350 for the
year ended September 30, 1996 and the nine months ended June 30, 1997,
respectively.
Inventories
Inventories consist of parts and supplies used in both the service and the
construction portions of the Company's operation. The inventory is valued at
the lower of cost or market, with cost determined on a first-in, first-out
(FIFO) basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets. Leasehold
improvements are amortized over the lesser of the remaining lease term or the
estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated.
F-168
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Warranty Costs
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 90
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
Income Taxes
The shareholders of the Company have elected to be taxed for federal and
Minnesota tax purposes as an S Corporation whereby the shareholders'
respective equitable shares in the taxable income of the Company are
reportable on their individual tax returns. The Company has made distributions
to the shareholders each year at least in amounts necessary to pay personal
income taxes payable on the Company's taxable income.
New Accounting Pronouncement
Effective October 1, 1995, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect
on the financial position or results of operations of the Company.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Accrued payroll costs and benefits.................... $209,324 $161,306
Other accrued expenses................................ 8,523 57,997
-------- --------
$217,847 $219,303
======== ========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
A summary of the status of uncompleted contracts is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Costs incurred........................................ $1,162,529 $811,487
Estimated earnings recognized......................... 60,763 108,605
---------- --------
1,223,292 920,092
Less billings on contracts............................ 1,189,421 644,195
---------- --------
$ 33,871 $275,897
========== ========
</TABLE>
F-169
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These costs and estimated earnings on uncompleted contracts are included in
the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $127,177 $295,298
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (93,306) (19,401)
-------- --------
$ 33,871 $275,897
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL SEPTEMBER 30, JUNE 30,
LIVES 1996 1997
---------- ------------- ----------
<S> <C> <C> <C>
Service and other vehicles............. 4-7 years $ 675,544 $ 845,186
Machinery and equipment................ 5-10 years 141,367 153,019
Office equipment, furniture and
fixtures.............................. 5-10 years 101,171 124,444
Leasehold improvements................. -- 52,386
--------- ----------
918,082 1,175,035
Less accumulated depreciation.......... (479,417) (480,878)
--------- ----------
$ 438,665 $ 694,157
========= ==========
</TABLE>
6. SHORT- AND LONG-TERM DEBT
The Company has an available line of credit of $450,000 that matures on
April 30, 1998. Advances issued are due on demand and accrue interest at 0.5%
above the prime rate. Also, the Company has an agreement to borrow up to
$350,000 of term debt secured by service and other vehicles and equipment. The
line of credit and equipment notes are secured by substantially all of the
Company's assets and the personal guarantees of certain shareholders. At June
30, 1997, the Company had $100,000 of outstanding borrowings on the line of
credit, and had approximately $320,000 of outstanding borrowings on the term
debt.
Short- and long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- --------
<S> <C> <C>
Borrowings under line of credit agreement............. $ -- $100,000
Note payable to bank, due in monthly installments of
$1,230, plus interest at 0.5% over prime, through May
1997, secured by service and other vehicles.......... 9,735 --
Note payable to bank, due in monthly installments of
$2,944, plus interest at 0.5% over prime, through
August 1997, secured by service and other
vehicles............................................. 32,695 6,195
Note payable to bank, due in monthly installments of
$1,805, plus interest at 0.5% over prime, through
November 1998, secured by service and other vehicles. 46,948 30,703
Note payable to bank, due in monthly installments of
$1,014, plus interest at 0.5% over prime, through
October 1998, secured by service and other vehicles.. 25,346 16,220
Note payable to bank, due in monthly installments of
$1,584, plus interest at 0.5% over prime, through
December 1998, secured by service and other vehicles. 42,744 28,488
</TABLE>
F-170
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1997
------------- ---------
<S> <C> <C>
Note payable to bank, due in monthly installments of
$2,081, plus interest at 0.5% over prime, through
April 1999, secured by service and other vehicles.. 64,497 45,772
Note payable to bank, due in monthly installments of
$2,083, plus interest at 0.5% over prime, through
February 2000, secured by service and other
vehicles........................................... -- 66,667
Note payable to bank, due in monthly installments of
$3,000, plus interest at 0.5% over prime, through
December 2000, secured by service and other
vehicles........................................... -- 126,000
--------- ---------
Total short- and long-term debt................... 221,965 420,045
Less short-term borrowings and current maturities... (120,233) (244,998)
--------- ---------
$ 101,732 $ 175,047
========= =========
</TABLE>
The line of credit and the equipment notes contain certain restrictive
covenants relating to, among other items, minimum net income, minimum tangible
net worth, and debt to tangible net worth.
The aggregate maturities of the short- and long-term debt as of September
30, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................................. $120,233
1998................................................................. 77,837
1999................................................................. 23,895
--------
$221,965
========
</TABLE>
7. LEASES
The Company operates out of facilities leased from a related entity under a
monthly operating lease requiring payments of $10,710 per month. The Company
sublets part of the building under an operating lease through February 1998.
Total rent expenses before sublease income for the year ended September 30,
1996 and the nine months ended June 30, 1997, were approximately $128,500 and
$96,400, respectively. Sublease income was approximately $39,000 and $29,250
for the year ended September 30, 1996 and the nine months ended June 30, 1997,
respectively. The Company has guaranteed the underlying mortgage
(approximately $405,000 as of September 30, 1996) for the facility.
8. RELATED PARTY TRANSACTIONS
During the year ended September 30, 1996 and the nine months ended June 30,
1997, the Company paid management fees to related parties totaling
approximately $110,100 and $60,075, respectively. In addition, as discussed in
note 7, the Company leases its operating facilities from a related entity.
9. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering all employees not covered by a
collective bargaining agreement. Eligible employees may contribute from 2 to
20% of their qualifying compensation to the plan, with the Company required to
match 50% of the employee's first 6% of contributions. The Company may make
additional contributions to the plan to the extent authorized by the Board of
Directors. Total expense related to this plan for the year ended September 30,
1996 and the nine months ended June 30, 1997, was approximately $30,100 and
$20,778, respectively.
F-171
<PAGE>
YALE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company makes contributions to union-administered benefit funds which
cover the majority of the Company's employees. For the year ended September
30, 1996 and the nine months ended June 30, 1997, the participation costs
charged to operations were approximately $592,400 and $511,720, respectively.
Governmental regulations impose certain requirements relative to multi-
employer plans. In the event of plan termination or employer withdrawal, an
employer may be liable for a portion of the plan's unfunded vested benefits,
if any. The Company has not received information from the plans'
administrators to determine its share of any unfunded vested benefits. The
Company does not anticipate withdrawal from the plans, nor is the Company
aware of any expected plan terminations.
10. SALES TO SIGNIFICANT CUSTOMER
During the year ended September 30, 1996 and the nine months ended June 30,
1997, sales to one customer accounted for approximately 18% and 26%,
respectively, of the Company's revenues.
11. COMMITMENTS AND CONTINGENCIES
Claims
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Stock Transfer Agreement
The Company has a stock transfer agreement with the shareholders
(participants) covering all shares of common stock whereby the Company is
required to repurchase the shares of a participant in certain circumstances.
Additionally, the Company has an option to repurchase the common shares of a
participant in certain circumstances.
12. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents and
short- and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
13. ACQUISITION OF COMPANY
In May 1997, the Company signed a letter of intent with Group Maintenance
America Corp. (GroupMAC), whereby GroupMAC will acquire the Company in a
merger transaction for a combination of cash and common shares of GroupMAC
concurrent with the consummation of the initial public offering of the common
stock of GroupMAC, subject to certain conditions including the negotiation of
definitive agreements and approval by Directors of both companies.
F-172
<PAGE>
[The inside back cover of the Prospectus contains a collage of nine
photographs. The photographs are in color and depict the following: a worker
with a clip board standing next to the open driver's door of an Airtron panel
truck, MacDonald-Miller workers in a classroom receiving instructions, a
Jarrell Plumbing six-wheel service truck, Linford employees discussing a
project at the rear of a panel truck, employees making a house call at a
residence, a worker unloading a step ladder from an All Service Electric panel
truck in front of a commercial building, a technician working on an electric
oven installation, a Paul E. Smith Company employee in a panel truck, and a
dispatcher working in front of a keyboard and color monitor.]
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS
OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLIC-
ITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO-
RIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLIC-
ITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 10
The Company............................................................... 17
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Selected Historical and Pro Forma Financial Data.......................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 41
Management................................................................ 52
Related Party Transactions................................................ 60
Security Ownership of Certain Beneficial Owners and Management............ 62
The Acquisitions.......................................................... 64
Description of Capital Stock.............................................. 65
Description of Bank Credit Agreement...................................... 67
Shares Eligible for Future Sale........................................... 69
Underwriting.............................................................. 72
Legal Matters............................................................. 73
Experts................................................................... 74
Available Information..................................................... 74
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL DECEMBER 1, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,500,000 SHARES
[LOGO OF GROUP MAINTENANCE AMERICA CORP. APPEARS HERE]
GROUP MAINTENANCE AMERICA CORP.
COMMON STOCK
----------------
PROSPECTUS
----------------
THE ROBINSON-HUMPHREY COMPANY
WILLIAM BLAIR & COMPANY
ABN AMRO CHICAGO CORPORATION
November 6, 1997
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